Types of Mortgages Explained: Fixed vs. Adjustable Rates (ARMs)
Understand how fixed-rate and adjustable-rate mortgages work, their risks and benefits, and how to decide which one fits your plans.
One of the first decisions borrowers face is whether to choose a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Both can be useful tools but they work very differently, and the “right” choice depends on how long you plan to keep the loan, how comfortable you are with payment changes, and how you expect your finances to evolve.
The Core Difference Between Fixed and Adjustable Rates
At a high level, the difference comes down to predictability versus flexibility.
- Fixed-rate mortgages keep the same interest rate for the entire loan term. Your principal-and-interest payment stays consistent from the first payment to the last.
- Adjustable-rate mortgages (ARMs) start with a fixed introductory rate, then adjust periodically based on market conditions after that initial period ends.
Neither option is universally “better.” The right choice depends on how long you expect to keep the loan and how much payment uncertainty you’re willing to accept.
Fixed-Rate Mortgages Explained
A fixed-rate mortgage locks in the interest rate for the full loan term, most commonly 30 years or 15 years. This means your monthly principal-and-interest payment does not change, even if market interest rates rise or fall later.
Why borrowers choose fixed-rate loans
- Stable monthly payments make budgeting easier
- No risk of payment increases due to rate changes
- Popular for long-term homeowners
- Simpler to understand than adjustable structures
Trade-offs to consider
- Initial interest rate is often higher than ARM intro rates
- You don’t automatically benefit if market rates drop
- Refinancing is required to lower the rate later
You plan to stay in the home long-term and value predictable payments more than chasing the lowest possible starting rate.
Adjustable-Rate Mortgages (ARMs) Explained
Adjustable-rate mortgages begin with a fixed introductory period—often 3, 5, 7, or 10 years—after which the rate can adjust at regular intervals. These adjustments are tied to a market index plus a lender margin.
Common ARM structures
- 5/1 ARM: fixed for 5 years, adjusts annually after
- 7/1 ARM: fixed for 7 years, adjusts annually after
- 10/1 ARM: fixed for 10 years, adjusts annually after
During the adjustable period, rate changes are limited by caps that restrict how much the rate can increase per adjustment and over the life of the loan. These caps help limit—but do not eliminate—risk.
Why borrowers choose ARMs
- Lower introductory rates compared to fixed loans
- Lower initial monthly payments
- Potential savings if you sell or refinance before adjustments
Risks to understand
- Monthly payments can increase after the fixed period
- Harder to budget long-term
- Future rates depend on market conditions
You expect to move, sell, or refinance before the fixed period ends—or you’re comfortable with potential payment changes later.
Fixed vs ARM: Side-by-Side Comparison
- Same rate for entire term
- Predictable payments
- Higher starting rate
- Best for long-term ownership
- Lower intro rate
- Payments can change later
- Rate caps apply
- Best for shorter time horizons
How to Choose Between a Fixed Rate and an ARM
Ask yourself a few practical questions:
- How long do I realistically plan to keep this home?
- Could my income handle a higher payment later?
- Do I value stability or flexibility more?
- Am I comfortable refinancing if rates change?
Many borrowers default to fixed-rate loans for peace of mind. Others strategically use ARMs when they have a clear exit plan. The key is aligning the loan type with your timeline—not guessing future rates.
Try comparing a fixed-rate loan and an ARM using the same home price and down payment. Seeing the payment differences side by side makes the trade-offs much clearer.