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Fixed vs Adjustable Rate Mortgages Cover

Fixed vs Adjustable-Rate Mortgages: What’s Right for You?

Disclaimer: The information in this article is for general guidance only and does not constitute financial, tax, legal, or mortgage advice. Always consult licensed mortgage or financial professionals about your specific circumstances. Calculations and examples are estimates.

Choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is one of the biggest decisions you’ll make when financing a home. Each option has clear benefits and trade-offs; understanding them will help you match a loan to your goals and risk tolerance.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage locks in the same interest rate—and therefore the same principal-and-interest payment—for the entire loan term, typically 15 or 30 years.1

Pros

  • Payment stability: Monthly principal and interest never change, even if market rates rise.
  • Budget certainty: Easier long-term planning, ideal if you’ll own the home for many years.
  • Simplicity: No need to track future rate adjustments.

Cons

  • Higher initial rate: Fixed loans usually start above comparable ARMs.1
  • Refinance cost: You must refinance (and pay closing costs) to benefit if market rates fall.

What Is an Adjustable-Rate Mortgage (ARM)?

An ARM starts with a fixed rate for a set period—commonly 5, 7, or 10 years—then adjusts annually based on a benchmark index plus a margin.2 Initial rates are often lower than fixed-rate loans.3

Pros

  • Lower upfront payment: Helpful if you expect to move or refinance before the first adjustment.
  • Potential savings: If market rates stay low, lifetime interest paid can be less than on a fixed loan.

Cons

  • Uncertainty: Payments may rise sharply after the fixed period.
  • Complex terms: You must understand indices, margins, and rate caps.
  • Budget risk: Higher future payments can strain finances if rates climb.

Key ARM Terms to Know

  • Index & margin: Together determine each adjustment’s new rate.
  • Rate caps: Limits on how much the rate can rise per adjustment and over the loan’s life.4
  • Lifetime cap: Often 5 percentage points above the start rate, but it can be higher.4
    For a deeper dive, review the CFPB’s CHARM booklet before choosing an ARM.5

Fixed vs Adjustable: How to Decide

Choose a fixed-rate mortgage if you:

  • Plan to stay in the home long-term.
  • Prefer predictable monthly payments.
  • Are risk-averse and value peace of mind.

Choose an ARM if you:

  • Expect to sell or refinance before the intro period ends.
  • Can handle possible payment increases later on.
  • Are comfortable accepting some rate risk to maximize short-term savings.

Only about 6 % of recent mortgage applications were ARMs, reflecting many borrowers’ preference for payment certainty.6

Example: 30-Year Fixed vs 5/1 ARM

Assume a $300,000 loan and average rates as of July 2025:

  • 30-year fixed: 6.67 % rate (Freddie Mac weekly survey)7 → about $1,936 monthly principal & interest.
  • 5/1 ARM: 5.90 % initial rate (typical spread below fixed)3 → about $1,777 monthly principal & interest.
  • Figures exclude taxes and insurance.

After five years, the ARM rate can adjust annually. With a 2 % first-adjustment cap and 5 % lifetime cap,4 the rate could climb as high as 10.90 %, raising the payment well above the fixed loan. Weigh the initial savings against that potential risk.

Tips for Picking the Right Mortgage

  • Match loan length to your horizon: If you’ll keep the property long-term, stability often wins.8
  • Read every ARM clause: Understand adjustment frequency, index, margin, and caps before signing.2
  • Stress-test your budget: Use a calculator to model higher ARM payments and confirm affordability.9
  • Compare at least three lenders: Small rate differences can save thousands over time.3
  • Ask questions: A qualified loan officer should explain scenarios in plain language.

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Sources

1. Investopedia – Fixed vs Adjustable-Rate Mortgages
2. Bankrate – Adjustable-Rate Mortgage Basics
3. Bankrate – Pros & Cons of ARMs
4. CFPB – ARM Rate Caps Explained
5. CFPB – CHARM Booklet (Adjustable-Rate Mortgages)
6. Mortgage Bankers Association – ARM Share of Applications
7. Freddie Mac – Primary Mortgage Market Survey® (July 3 2025)
8. CFPB – Deciding How Much to Spend on a Home
9. CFPB – Mortgage Calculator Guidance