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A Guide to Adjustable vs. Fixed-Rate Mortgages

The Similarities and Differences Between These Loan Types

When you’re buying a home, you can choose either an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. Depending on your financial situation and goals, there are advantages and disadvantages of both. By understanding these differences, you’ll be able to know the best one to choose when you buy a home or refinance your mortgage. You might opt for an ARM if you’re not planning to own your home longer than the ARM’s introductory-rate period (when the interest rate is fixed and often lower than a comparable fixed-rate mortgage). On the other hand, you might decide on a fixed-rate loan if you’re planning to be in your home for many years and want consistent monthly mortgage payments that don’t change for the life of your loan. Read our comparison of fixed-rate mortgages and ARMs below and find out which option is best for you.

Adjustable vs. Fixed-Rate Mortgages: An Overview

To know which loan will save you the most money and best fit your financial situation, we’ll start by defining both and give you a general idea of their function and purpose.

Adjustable-Rate Loans: An adjustable-rate mortgage typically has a lower, fixed rate for the first few years of the loan known as the introductory (or initial) rate period, after which your monthly payments can increase or decrease based on current interest rates and financial markets. ARMs are often chosen to take advantage of the lower initial mortgage rates, but they pose the risk of higher payments if market rates rise once your initial rate period ends.

Fixed-Rate Loans: A fixed-rate mortgage’s interest rate remains the same for the entire duration of the loan, providing stable and predictable monthly payments. While fixed-rate mortgages offer budgeting consistency, their interest rates are usually slightly higher than an ARM’s introductory rate, and they don’t allow for potential savings if interest rates fall during the mortgage term (usually 30 or 15 years).

How Adjustable vs. Fixed-Rate Home Loans Work

Both ARMs and fixed-rate mortgages come with their own set of advantages, risks, and ideal scenarios depending on your financial goals and market conditions. This section breaks down how both types of loans work so you can make an informed decision that best suits your homeownership or financial plans.

How Adjustable-Rate Mortgages Work

Most ARMs start with a fixed interest rate for an introductory period, typically 3, 5, 7, or 10 years, during which the monthly payments remain the same. After this fixed period, the interest rate adjusts periodically (depending on the type of ARM) based on a market index plus a margin set by the lender. These adjustments can cause monthly payments to increase or decrease over time. Despite the changing rates, the overall loan amortization terms are the same as most fixed-rate mortgages, usually 15 or 30 years. In short, ARMs usually offer lower initial rates than fixed-rate loans but carry the risk of higher future payments.

How Fixed-Rate Mortgages Work

Fixed-rate mortgages have an interest rate that stays the same for the entire life of the loan, which means monthly payments are consistent. This provides long-term stability, making it easier for borrowers to budget their finances. The predictability can be especially valuable when there are rising interest rates. Loan terms can vary for a fixed-rate mortgage, but the most common are 15-, 20-, and 30-year mortgages.

ARM vs. Fixed-Rate Mortgage: Which Should I Choose?

Choosing between an ARM and a fixed-rate mortgage depends largely on your financial goals, how long you plan to own your home, your ability to refinance your mortgage, and your comfort level with potential increases in monthly payments. Fixed-rate mortgages are a good fit for buyers who value long-term consistency. On the other hand, ARMs appeal to those not planning to own their home for more than 10 years and to homeowners buying more expensive homes. ARMs make the most financial sense when the savings during the initial fixed-rate period are substantial. During the introductory period, the larger the mortgage amount, the larger the potential savings with an ARM vs. a fixed-rate mortgage.

Understanding your priorities, whether it’s locking in a steady rate or taking advantage of initial savings, is key to making the right choices. It’s also important to consider long-term flexibility. For example, some borrowers plan to refinance an ARM before rate adjustments begin. The next section will break down the pros and cons of each option to help you determine which loan structure best aligns with your situation and goals.

ARM Pros and Cons

ARMs can offer homebuyers a lower initial interest rate compared to fixed-rate loans, making them an attractive and financially savvy short-term option. However, it’s important to understand how future adjustments and rate caps can impact long-term affordability. Check out the pros and cons of ARMs below.

Pros	Cons
Lower initial payments: During the introductory period of an ARM, the interest rate is fixed and typically lower than that of a fixed-rate mortgage. Savings in a changing rate environment: If the market is favorable, lower interest rates can help you save on mortgage payments. Ability to refinance: An ARM allows you to take advantage of lower rates during the introductory period, but when it ends, you can refinance to a fixed-rate mortgage to avoid fluctuating rates. If the cost of refinancing is less than you save with the initial fixed rate, that savings goes in your pocket.	Complexity: ARMs can be more complicated than fixed-rate mortgages because changing interest rates affect mortgage payments after the initial fixed period. You need to know when your rate adjusts, how often it can adjust and by how much. Potential long-term higher costs: If interest rates remain high throughout the life of your ARM, you’re looking at higher overall interest payments that could’ve been avoided with a fixed-rate mortgage. Fluctuating mortgage payments: After the introductory period ends, your mortgage payment will be adjusted based on a financial index rate plus a margin that your lender sets.

Pros

Cons

Lower initial payments: During the introductory period of an ARM, the interest rate is fixed and typically lower than that of a fixed-rate mortgage.
Savings in a changing rate environment: If the market is favorable, lower interest rates can help you save on mortgage payments.
Ability to refinance: An ARM allows you to take advantage of lower rates during the introductory period, but when it ends, you can refinance to a fixed-rate mortgage to avoid fluctuating rates. If the cost of refinancing is less than you save with the initial fixed rate, that savings goes in your pocket.

Complexity: ARMs can be more complicated than fixed-rate mortgages because changing interest rates affect mortgage payments after the initial fixed period. You need to know when your rate adjusts, how often it can adjust and by how much.
Potential long-term higher costs: If interest rates remain high throughout the life of your ARM, you’re looking at higher overall interest payments that could’ve been avoided with a fixed-rate mortgage.
Fluctuating mortgage payments: After the introductory period ends, your mortgage payment will be adjusted based on a financial index rate plus a margin that your lender sets.

Fixed-Rate Mortgage Pros and Cons

Fixed-rate mortgages have predictable monthly payments and long-term stability, making them very popular to buyers planning to stay in their home for many years. Unlike adjustable-rate options, the interest rate remains the same for the life of the loan, protecting borrowers from market fluctuations. However, this stability may come at a price. Check out the pros and cons of fixed-rate mortgages below.

Pros	Cons
Simplicity: A fixed-rate mortgage keeps the same interest rate for the entire life of the loan, allowing for consistent budgeting. Predictable mortgage payments: Mortgage principal and interest payments remain the same for the entire loan term, meaning you don’t have to worry about rising payments. Protected interest rate: You get to keep the same interest rate on your loan for your entire mortgage term, potentially saving thousands of dollars in interest compared to an ARM in a rising rate environment.	Possible higher rates: Interest rates for fixed-rate mortgages are typically higher than the introductory rates of an ARM. Lack of flexibility with falling rates: If interest rates begin to fall, you can’t take advantage of them unless you refinance, causing a potential loss in savings.

Pros

Cons

Simplicity: A fixed-rate mortgage keeps the same interest rate for the entire life of the loan, allowing for consistent budgeting.
Predictable mortgage payments: Mortgage principal and interest payments remain the same for the entire loan term, meaning you don’t have to worry about rising payments.
Protected interest rate: You get to keep the same interest rate on your loan for your entire mortgage term, potentially saving thousands of dollars in interest compared to an ARM in a rising rate environment.

Possible higher rates: Interest rates for fixed-rate mortgages are typically higher than the introductory rates of an ARM.
Lack of flexibility with falling rates: If interest rates begin to fall, you can’t take advantage of them unless you refinance, causing a potential loss in savings.

Final Thoughts: Adjustable-Rate vs. Fixed-Rate Mortgages

Ultimately, choosing between an ARM or a fixed-rate mortgage depends on your homeownership goals. ARMs tend to be better for homeowners that don’t plan to own the same home for very long because of the lower introductory rates, but after this period, mortgage payments change with the market. Fixed-rate mortgages are attractive for homeowners that plan to own their home for a long time and offer more financial stability than ARMs. Take the first step in getting a home loan by getting prequalified for a mortgage today and let Freedom Mortgage help you find out if an ARM can save you money or if a fixed-rate mortgage is your best choice.