Choosing Between a Fixed-Rate and an Adjustable-Rate Mortgage
Introduction
When purchasing a home, selecting the right mortgage is a crucial decision. The two primary types of mortgages—fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs)—offer different advantages depending on your financial goals and homeownership plans.
This guide will break down how each mortgage type works, their benefits, and when each option might be the best fit for you.
Key Concepts
1. What Is a Fixed-Rate Mortgage (FRM)?
A fixed-rate mortgage (FRM) has an interest rate that stays the same for the entire loan term, ensuring stable monthly payments.
🔹 Key Benefits of a Fixed-Rate Mortgage:
✔ Predictability – Your mortgage payment remains the same throughout the loan.
✔ Inflation Protection – Even if interest rates rise in the future, your rate remains locked in.
✔ Option to Refinance – If rates drop significantly, you can refinance (usually without penalty) to a lower rate.
📌 Example:
- You take out a 30-year fixed-rate mortgage with a 6.5% interest rate and a $1,200 monthly payment.
- In 10, 20, or 30 years, your payment will still be $1,200, assuming no changes to property taxes or insurance.
- This stability makes an FRM a great choice for long-term homeowners.
📖 Explore: Fixed- or Adjustable-Rate Calculator to compare mortgage options.
2. What Is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) has an interest rate that remains fixed for an initial period (e.g., 3, 5, or 10 years) and then adjusts periodically based on market conditions.
🔹 Key Features of an ARM:
✔ Lower Initial Rate – Typically lower than a fixed-rate mortgage, making it more affordable upfront.
✔ Potential Rate Adjustments – After the fixed period, your rate may increase or decrease.
✔ Rate Caps – Limits on how much your rate can change per adjustment period and over the life of the loan.
📌 Example:
- You choose a 5/1 ARM with an initial 5.0% interest rate.
- For the first five years, your payment remains the same.
- In year six, your rate adjusts annually based on market conditions.
- If rates rise, your monthly payments increase; if rates drop, your payments may decrease (depending on your loan terms).
📖 Explore: Understanding Rate Caps on ARMs to estimate future payments.
Data Insights: Fixed-Rate vs. Adjustable-Rate Mortgage
Comparing Monthly Payments
| Mortgage Type | Initial Interest Rate | Rate Stability | Best For |
|---|---|---|---|
| Fixed-Rate Mortgage | Higher | 100% Stable | Long-term homeowners who want predictable payments. |
| Adjustable-Rate Mortgage | Lower | Adjusts after the fixed period | Buyers planning to sell or refinance before the rate adjusts. |
📊 Example Comparison:
- 30-Year FRM at 6.5%: $1,200/month for the entire loan term.
- 5/1 ARM at 5.0% (First 5 Years): $1,050/month initially, but may increase after year 5.
💡 Insight: If you plan to stay in your home for 10+ years, a fixed-rate mortgage offers long-term security. If you sell within 5 years, an ARM may provide lower initial payments.
Common Misconceptions About Mortgages
❌ “ARMs always have lower lifetime costs.”
✅ If interest rates rise significantly, an ARM can become more expensive than an FRM.
❌ “You can’t refinance an ARM.”
✅ Many homeowners refinance an ARM into an FRM before the rate adjusts.
❌ “A fixed-rate mortgage is always better.”
✅ If you plan to move within a few years, an ARM might save you money in the short term.
Practical Applications: Choosing the Right Mortgage for You
When to Choose a Fixed-Rate Mortgage
✔ You plan to stay in your home for 10+ years.
✔ You prefer stable, predictable payments.
✔ You want protection against rising interest rates.
When to Choose an Adjustable-Rate Mortgage
✔ You plan to sell or move within 5 years.
✔ You expect interest rates to decline.
✔ You want lower initial monthly payments.
📖 Learn More: Step-by-Step Guide to Buying a Home.
Next Steps
✅ Evaluate your homeownership timeline – Will you stay in your home long-term or move within a few years?
✅ Compare mortgage rates – Use a mortgage calculator to estimate payments for FRMs and ARMs.
✅ Discuss with a lender – A financial expert can help you determine the best option based on your situation.
✅ Consider refinancing options – If you choose an ARM, plan for potential refinancing if rates increase.
Understanding your mortgage options ensures that your home purchase aligns with your financial goals and future plans. 🏡💰
Choosing Between a Fixed-Rate and an Adjustable-Rate Mortgage
There are two main types of mortgages — fixed-rate and adjustable-rate — that have been serving families for decades. Each mortgage comes with its own set of features and benefits that you should carefully consider before deciding which is best for you.
About Fixed-Rate Mortgages
A fixed-rate mortgage (FRM) is the most common type of mortgage, with 90% of buyers preferring it. With a fixed-rate mortgage, your interest rate remains the same for the life of the loan, no matter the length. This provides peace of mind for those who value the security of a fixed rate.
The benefit of the fixed–rate mortgage boils down to inflation protection:
- If mortgage rates, increase your mortgage rate will not change during your mortgage term.
- If mortgage rates drop significantly, you have the option to refinance, usually without penalty, to get a new loan that takes advantage of the lower rates.
Let’s Look at an Example
Let’s say you lock in a 30-year fixed-rate mortgage at 6.5% and your mortgage payment is $1,200 per month.
With a fixed-rate mortgage, your payment will be the same in 12, 18 and 26 years, assuming you haven’t tapped into your equity or refinanced your mortgage. No matter how high rates may rise over the next 30 years, your payment will always be based on your 6.5% rate. Be aware, however, that your taxes and insurance costs will likely increase.
About Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is much less common and works differently than a fixed-rate mortgage. With an adjustable-rate mortgage, the interest rate is fixed for a set period — from six months to 10 years — and then fluctuates up or down for the life of the loan.
Typically, the rate of an ARM will start off lower than a fixed-rate mortgage, but your monthly payments may increase over time and you will need to be financially prepared for the adjustments. Most ARMs do have a limit on how much the interest rate can go up or down within an adjustment period.
If you plan to sell your home in less than five years, or before the adjustment period of the loan, an ARM may make sense so you can take advantage of lower payments in the initial years of the mortgage. Be sure you know the details of how and when your payments may change and evaluate your options carefully. A lender can run the numbers for you based on your personal situation.
Let’s Look at an Example
Let’s say you chose a 5/1 ARM and lock in with a 5.0% interest rate.
Your mortgage will stay the same for the first five years, and then it can change once a year for the remaining term of the loan.
If interest rates increase, your monthly payments will increase. If rates go down, your payment may go down, but that’s not the case for all ARMs. Also, some ARMs set a cap on how high your interest rate can go and some limit how low your interest rate can go.
The Bottom Line
If you plan to stay in your home for 10 years or longer, consider a fixed-rate mortgage. If you plan to sell earlier, say within five years, an ARM may make more sense for you.
To determine the type of mortgage that’s right for you, lean on your lender or financial professional for guidance.
