Fixed-Rate vs. Adjustable-Rate Mortgages: What’s the Difference?

Choosing a mortgage may be the biggest financial decision you’ll make in your lifetime. The type of home loan you select can influence your monthly payments, long-term borrowing costs and overall financial flexibility.

The two main options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). A fixed-rate mortgage has an interest rate that stays the same over the life of the loan, while the rate on an ARM often starts lower but can increase over time.

Understanding fixed-rate vs. adjustable-rate mortgages can help you determine which type better fits your situation and risk tolerance. Here’s how they both work.

How Fixed-Rate Mortgages Work

A fixed-rate mortgage is a home loan with an interest rate that stays the same over the life of the loan. Even if market rates increase in the future, your mortgage rate will be locked in.

“The payments of both principal and interest do not change, which simplifies long-range budget planning,” says Ryan Fitzgerald, Realtor and owner of Raleigh Realty. “First-time home buyers especially are drawn to this fixed stability.”

Your total monthly payments could still increase slightly due to variable costs like homeowners insurance and property taxes, but they’ll be more predictable than they would with an adjustable-rate mortgage.

If interest rates fall in the future, you could consider refinancing for a better rate. Refinancing typically comes with closing costs, so you’ll need to weigh those expenses against your potential savings.

Most fixed-rate mortgages come with 15- or 30-year terms. A 30-year term is by far the most common, with about 90% of homebuyers selecting it, according to Freddie Mac.

Pros and Cons of Fixed-Rate Mortgages

Here are some fixed-rate mortgage benefits, along with some potential downsides.

Pros

Predictable payments: Since your interest rate stays the same, you’ll pay the same amount toward your home loan’s principal and interest charges each month.
Protection from rising interest rates: Your rate will be locked in, so there’s no risk of it increasing in the future.
Easier budgeting: More predictable monthly payments are easier to work into your budget and spending plan.
Long-term certainty: You can estimate your long-term loan costs from the beginning, which is especially helpful for buyers planning to stay in the home long-term.

Cons

Higher initial rates than many ARMs: Fixed interest rates may be higher than the initial rate you could get on an ARM.
Potentially higher monthly payments initially: A higher interest rate means higher monthly loan payments, at least at the beginning.
Less benefit if you’re moving soon: If you’re planning to sell or refinance quickly, you may miss out on the savings you could get with an ARM.

How Adjustable-Rate Mortgages Work

An adjustable-rate mortgage is your other option for a home loan. With an ARM, your interest rate can change after an initial fixed period.

The rate is tied to a benchmark index, like the Secured Overnight Financing Rate (SOFR). The lender then adds their own percentage on top, known as the margin. As the index fluctuates with market conditions, your mortgage rate can change as well.

Rate changes impact your monthly mortgage payments. If market rates rise, your monthly payments could significantly increase. Rates don’t always go up, though — your rate could also decrease if market rates go down.

There’s also a limit on how much your rate can change at any one time or over the life of the loan, explains Fitzgerald.

“Adjustable-rate mortgages typically have several caps that limit the amount of increase or decrease in the interest rate,” he says. “Understanding these caps before you sign any documents is critical.”

Common ARM Structures Explained

ARMs are usually described by two numbers separated by a slash. The first number describes how long the initial fixed-rate period lasts, and the second number indicates how often your rate will adjust after that. Lenders typically adjust the rates on an ARM every six or 12 months.

Here are a few examples:

5/1 ARM: This ARM has a fixed interest rate for five years. After that, the rate will adjust once per year.
7/1 ARM: With this one, you’ll get a fixed rate for seven years followed by an annual rate adjustment.
10/1 ARM: This ARM locks in a fixed rate for a full 10 years before adjusting it once per year.
5/6 ARM: This ARM has a five-year fixed-rate period, followed by rate adjustments every six months.

Pros and Cons of Adjustable-Rate Mortgages

Here’s a closer look at adjustable-rate mortgage risks and advantages.

Pros

Often lower introductory rates: ARMs often have lower initial rates than fixed-rate mortgages.
Lower initial monthly payments: With a lower rate, you’ll have more affordable monthly payments.
Potential savings if rates stay low: If rates stay low, you could save a significant amount by opting for an ARM.
May work well for short-term homeowners: ARMs tend to be most cost-effective for buyers who plan to sell or refinance within five to 10 years.

Cons

Payment uncertainty: Once your initial fixed-rate period ends, your payments could change, which could put a strain on your budget.
Risk of rising rates: If market rates increase, the rate on your ARM could rise significantly.
More complex loan structure: ARMs are more complicated than fixed-rate mortgages, so make sure you understand the structure before committing.
Harder long-term budgeting: With an ARM, it’s tough to estimate your borrowing costs upfront or predict how your mortgage payments will impact your budget and long-term financial goals.

Fixed-Rate vs. Adjustable-Rate Mortgages at a Glance

FeatureFixed-rate mortgageAdjustable-rate mortgage

Initial interest rateOften higherOften lower
Monthly payment stabilityPrincipal and interest payments stay the samePayments may change over time
Long-term predictabilityHigh; you can estimate your borrowing costs upfrontLow; you can’t predict how interest rates will change in the future
Risk levelLow, since your rate is locked inHigher, since your rate can fluctuate with market conditions after an initial fixed-rate period
Potential savingsMay be more affordable for long-term homeownersMay be more affordable for buyers who are planning to sell or refinance in the near future
Best fitLong-term homeowners who prefer predictability and stabilityHomeowners who are planning to sell or refinance within 5-10 years

How Interest Rates Affect Each Mortgage Type

Interest rates have a major influence on your monthly payments and overall loan costs.

Fixed-Rate Mortgages

Fixed-rate mortgages are protected from future rate increases, since you lock in your rate at closing. The only way you can change your rate is if you choose to refinance down the line.

If market rates rise, you’ll benefit from having locked in a lower rate than what’s currently available. If rates fall, though, you won’t get any benefit unless you decide to refinance.

Adjustable-Rate Mortgages

After your fixed-rate period ends on an ARM, your interest rate and monthly payments could increase. There’s typically a cap on how much rates can increase at any one time or over the life of the loan.

If rates rise, your monthly mortgage payments will get more expensive. If they fall, your monthly payments will go down. ARM borrowers can benefit from decreasing market rates without having to manually refinance.

Who May Benefit From Each Mortgage Type?

You might benefit from a fixed-rate mortgage if you fall into any of these categories:

First-time homebuyers: If this is your first time buying a home, you might appreciate predictable payments.
Buyers who value stability: Stable payments can make it easier to budget and get rid of financial uncertainty around your housing costs.
Long-term homeowners: If you’re staying in the home for a long time, you won’t have to worry about your rate increasing over time.
Borrowers with tight budgets: If you don’t have flexibility in your budget, you may want to avoid the payment jumps that can come with an ARM.

“Most long-time homeowners, first-time home buyers with limited budgets and people who prefer payment certainty should use fixed-rate mortgages as their primary financing option,” advises Fitzgerald.

An adjustable-rate mortgage may be preferable for these types of buyers:

Buyers planning to move within a few years: You could enjoy the lower introductory rate and move before that fixed-rate period comes to an end.
Borrowers expecting significant income growth: In this case, a rising monthly payment may not be an issue for your finances.
Buyers comfortable with some uncertainty: ARMs carry greater risk and unpredictability than fixed-rate mortgages.
Homeowners planning to refinance before adjustments occur: You can refinance from an ARM to a fixed-rate mortgage.

“An ARM generally has a lower introductory rate than a fixed-rate mortgage, which means it can save you money up to that adjustment period,” says Fitzgerald.

What to Consider Before Choosing

One type of mortgage isn’t inherently better than the other — it all depends on your goals and financial situation. Here are a few factors to consider when deciding between an ARM and a fixed-rate mortgage.

Time horizon: How long do you plan to stay in the home? If you’re in it for the long haul, the stability of a fixed-rate mortgage may be preferable. If you’ll be moving soon, an ARM could potentially offer some savings.
Risk tolerance: Are you comfortable with the uncertainty of a fluctuating interest rate? Or do you prefer to lock in a rate that will stay the same regardless of market conditions?
Budget flexibility: Can your budget handle potential payment increases in the future? Consider how an adjustable vs. fixed rate would affect your finances.
Current interest rate environment: Are current rates high or low? In a high-rate environment, the lower introductory rate of an ARM may be appealing. If market rates are low, it could be wise to lock in a low rate while you can.

Bottom Line

Some borrowers would benefit from a fixed-rate mortgage, while others would do better with an adjustable-rate mortgage. The right choice comes down to several factors, including how long you plan to stay in the home, the current interest rate environment and your tolerance for uncertainty. By weighing the benefits and tradeoffs of each option, you can determine whether a fixed-rate mortgage or ARM would better fit your situation.

Fixed-Rate vs. Adjustable-Rate Mortgage FAQs

Is an ARM Cheaper Than a Fixed-Rate Mortgage?

The interest rate on an ARM often starts out lower than the rate on a fixed-rate mortgage, but it could increase in the future. An ARM may offer savings for homeowners planning to sell or refinance within about five to 10 years, but it carries the risk of becoming more expensive for long-term homeowners.

Can an Adjustable-Rate Mortgage Payment Increase?

Yes, payments on an adjustable-rate mortgage can increase. After an initial fixed-rate period, the rate on an ARM adjusts once or twice per year. If the rate goes up, your payments will increase as well.

What Do the Numbers in a 5/1 ARM Mean?

The numbers indicate how long the initial fixed-rate period lasts and how many times the rate adjusts after that. A 5/1 ARM has a five-year fixed-rate period, followed by a rate adjustment once per year.

Are Adjustable-Rate Mortgages Risky?

Adjustable-rate mortgages can be risky, since you can’t predict the future of interest rates. They tend to be riskier for homeowners who will have the mortgage for a long time.

When Does a Fixed-Rate Mortgage Make the Most Sense?

A fixed-rate mortgage may make the most sense for long-term homeowners who want predictable monthly payments and no risk of a rate increase. If rates are low, it can also make sense to lock in a low rate before they potentially rise in the future.

When Might an Adjustable-Rate Mortgage Be a Good Option?

An ARM may be a good option for homeowners who are planning to sell or refinance before the fixed-rate period ends or are comfortable with some uncertainty around their interest rate and monthly payments.

Can I Refinance From an ARM Into a Fixed-Rate Mortgage?

Yes, you can refinance from an ARM into a fixed-rate mortgage if you want to lock in a fixed rate and predictable monthly payments.

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Fixed-Rate vs. Adjustable-Rate Mortgages: What’s the Difference?