Key takeaways
- A fixed-rate mortgage carries the same interest rate for the loan's lifetime, while an adjustable-rate mortgage comes with a rate that adjusts annually or semi-annually (after a fixed introductory rate).
- The rate on your ARM can’t increase indefinitely — rate caps limit the amount it can go up in the adjustment period and over the loan term.
- While fixed-rate mortgages are the most common, adjustable-rate mortgages (ARMs) are rising in popularity.
If you’re looking to buy a house right now, you might be weighing a fixed-rate versus adjustable-rate mortgage (ARM). While the traditional fixed-rate mortgage remains the homebuyer go-to, ARMS are increasing in popularity: They account for 18.6% of the dollars going to conventional, single-family mortgages in April 2023 — four times higher than in January 2021, according to CoreLogic.
The growth is due largely to the rapid rise in interest rates. However, while ARMs tend to come with a lower introductory rate, that rate won’t stay the same forever, and these types of loans aren’t right for everyone. Here’s everything you need to know about the difference between fixed- and adjustable-rate mortgages.
In this article
- Understanding fixed-rate vs. adjustable-rate mortgages
- Differences between fixed-rate vs. adjustable-rate mortgages
- Similarities between fixed-rate vs. adjustable-rate mortgages
- Choosing between a fixed-rate or adjustable-rate mortgage
- FAQ about ARMs vs. fixed-rate mortgages
Understanding fixed-rate vs. adjustable-rate mortgages
How fixed-rate mortgages work
A fixed-rate mortgage has the same interest rate for the life of the loan, so your monthly loan principal and interest payment won’t change unless you refinance. Fixed-rate mortgages typically come in 30-year and 15-year terms, but there are also flexible term options anywhere from eight years to 29 years.
Keep in mind:Your mortgage payments can still fluctuate even if you have a fixed rate. That's because your property taxes and homeowners insurance premiums, which are typically bundled in one payment with the mortgage, change over time. The portion of your payment that's loan principal and interest, however, stays the same.
How adjustable-rate mortgages (ARMs) work
An ARM has an interest rate that changes at set intervals after a fixed-rate introductory period. Intro periods are most commonly three, five, seven or 10 years. Generally, this initial fixed interest rate is lower than that of a standard fixed-rate mortgage. Once that introductory term ends, your rate will adjust up or down at predetermined times, usually every six months or every year. These adjustments are often tied to a stock market or financial index, such as the Secured Overnight Financing Rate, or SOFR.
Differences between fixed-rate vs. adjustable-rate mortgages
The biggest difference between a fixed-rate mortgage and an ARM is that, with the former, your monthly principal and interest payment stay constant. With an ARM, the payment changes after the introductory period is over.
The other key differences include:
- Initial interest rate: An ARM typically has a lower initial interest rate and monthly payment than a fixed-rate loan.
- Interest rate over time: After the ARM’s initial rate period, the rate and monthly payment can rise (or fall). If it increases, you could wind up with an unaffordable monthly payment. A fixed-rate mortgage, by contrast, has a fixed payment throughout the life of the loan; the rate and payment won’t change unless you refinance to a different loan.
- Rate caps: The rate on your ARM can’t increase past a certain point with each adjustment, nor over the life of the loan.
- Down payment minimum: A conventional ARM requires a higher down payment of 5 percent, compared to 3 percent on some conventional fixed-rate loans.
ARM vs. fixed-rate mortgage payments example
While the initial payment of an ARM might look more attractive than a fixed-rate payment, it’s important to know the maximum amount you could wind up paying, too. In this example, we illustrate the potential for a worst-case scenario, assuming a first adjustment cap of 5 percent, a subsequent adjustment cap of 1 percent and a lifetime cap of 5 percent:
| 5/1 ARM (30 years) | 30-year fixed-rate mortgage | |
|---|---|---|
| Home price | $390,000 | $390,000 |
| Loan amount | $370,500 (5% down) | $378,300 (3% down) |
| Initial interest rate | 6.08% | 7.10% |
| Initial mortgage payment | $2,299 | $2,542 |
| Maximum interest rate | 11.08% | 7.10% |
| Maximum mortgage payment | $3,550 | $2,542 |
Note that the max interest rate above wouldn’t appear overnight. Lenders typically cap rate adjustments at 1 or 2 percentage points per period. And there’s no rule that it’ll go up, either: It’s all up to the market. You could wind up lucky and see the rate fall, too.
Bankrate’s calculator can help you compare the math on a fixed-rate loan vs. an ARM.
Similarities between fixed-rate vs. adjustable-rate mortgages
Fixed-rate mortgages and adjustable-rate mortgages aren’t entirely different animals. These two types of loans have some components in common:
- Both come with standard 30-year repayment options: Both conventional fixed-rate and adjustable-rate mortgages offer standard 30-year terms.
- Both require good credit to qualify: With either a fixed-rate mortgage or an ARM, a lender will be assuming a certain level of risk to loan you the money. With that in mind, you’ll need good to excellent credit to get approved and with the most favorable terms.
- Both can be refinanced: Whether you have a fixed-rate or an adjustable-rate mortgage, you’ll have the option to refinance down the line. (With an ARM, this is the key to getting out of the loan prior to the first rate reset, if that’s your plan.)
Choosing between a fixed-rate or adjustable-rate mortgage
There’s no right or wrong answer between a fixed-rate and adjustable-rate mortgage — both come with pros and cons. That said, fixed-rate mortgages are by far the more popular choice, and generally safer for borrowers.
Still, one type of loan might be a better fit over the other. Here’s what to consider.
Fixed-rate mortgages might be best for:
- Borrowers planning to stay put: If you’re planning to make your next move a permanent one, the stability of a fixed-rate mortgage might be the best option. You won’t ever need to worry about increases to your monthly principal and interest payment, and you’ll have the option to refinance in the future if rates come down.
- First-time homebuyers: Buying a house is a complicated process, and the extra considerations and nuances of an ARM can make it even more daunting. Plus, most dedicated first-time homebuyer loan programs only come with the fixed-rate option.
Adjustable-rate mortgages might be best for:
- Anyone who plans to move or refinance before the end of the introductory period: If you plan to move — or refi — before the ARM adjusts, you could save money with a low initial ARM payment.
- Borrowers with jumbo loans: Generally, bigger loans come with higher interest rates. The low intro rate of an ARM could grant you significant savings at the start of a loan.
FAQ about ARMs vs. fixed-rate mortgages
Yes. An ARM comes with a greater risk of a higher monthly payment if rates are higher in the future. That long-term risk, however, comes with the reward of a lower monthly payment during your intro period.
ARMs may be more difficult to qualify for due to requiring a minimum 5 percent down payment, while some fixed-rate mortgages only require 3 percent down. Also, most lenders will assess your ability to make higher payments based on the potential ARM adjustments, not just the initial lower payment. They both come with similar credit score requirements, though.
There are different types of adjustable rate mortgages. Here are a few ways they vary:
- The length of the introductory period
- How frequently the rate adjusts after the intro period
- Whether they’re conventional, jumbo, VA, FHA or USDA loans
There are a wide range of home financing options including government-insured loans and programs specifically geared toward first-time homebuyers.
