Fixed vs. adjustable-rate mortgage (ARM): What’s the difference?
![Woman standing in front of house](https://www.bankrate.com/2017/09/04132115/Choosing-between-an-adjustable-rate-and-fixed-rate-mortgage.jpg?auto=webp&optimize=high&crop=16:9)
The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Our writers and editors used an in-house natural language generation platform to assist with portions of this article, allowing them to focus on adding information that is uniquely helpful. The article was reviewed, fact-checked and edited by our editorial staff prior to publication.
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 accounted for 16 percent of the dollars going to conventional, single-family mortgages in October 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.
9.2%
Source: Mortgage Bankers Association
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 interest 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 adjustable rate mortgage 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 has to do with the nature of their interest rate. With a fixed-rate mortgage, your monthly payment of principal and interest stays constant. With an ARM, the payment changes after the introductory period is over — due to an adjustment in the interest rate. And it will continue to adjust throughout the loan term.
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 all depends on 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 about 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 less risky for borrowers.
Still, one type of loan might be a better fit over the other. Here’s what to consider.
The financial outlook
Obviously, the current interest rate environment is influential. If mortgage rates are low or steady, it might be best to lock ’em in with a fixed-rate mortgage. On the other hand, if interest rates are high or volatile, an ARM may be a more enticing option, especially if the short-term trend seems upwards. ARMs usually kick off with lower interest rates compared to fixed-rate mortgages; by the time the introductory period ends and the ARM resets, rates may have fallen, enabling borrowers to enjoy the benefits without having to refinance their loan.
Your personal finances
Having a fixed-rate mortgage means enjoying the comfort of a set interest rate throughout the loan’s duration, which is perfect for those who value having consistent monthly payments, unaffected by any market interest rate variations.This constancy enables loan holders to budget effectively, even if their income varies from month to month. If you’re in that situation, you might not want to risk an ARM’s fluctuating payments.
On the other hand, ARMs can be a plus for those who foresee a boost in their income down the line: finishing graduate school, switching from the public to the private sector, etc. They’ll be able to handle the transition from less expensive monthly payments at the start of the mortgage term to pricier ones when the ARM resets.
Also, a note for the cash-crunched: ARMs typically require a slightly higher down payment than a comparable fixed-rate counterpart.
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.
- Borrowers with a “set it and forget it” nature: If you’re not a market watcher, if you’re a partisan of the predictable and prix fixes, then a fixed-rate mortgage guarantees your monthly obligation remains the same for the duration of the loan.It’s a boon in budget-planning.
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.
- Borrowers with foreseeable lifestyle changes: If you can count on a major rise in your earnings over time or a financial windfall, you can easily handle any rate increases and payment hikes.
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, since they usually have 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.
-
Choosing an adjustable-rate mortgage over a fixed-rate mortgage could be beneficial for several reasons. ARMs often begin with rates that are lower than those of fixed-rate loans, so the initial lower payments can allow buyers to dedicate more of their budget to the home’s purchase price. The opportunity for reduced initial payments and interest rates is particularly enticing, especially when overall interest rates are high (but projected to drop). When interest rates decrease, the adjustable rate will fall in tandem, offering further financial advantages.
Related Articles
![Financial planning with professionals](https://www.bankrate.com/brp/2024/01/20103621/conforming-vs-nonconforming-loans-300x169.jpg?auto=webp&fit=crop&width=230&height=150)
![What is a 3/1 ARM](https://www.bankrate.com/2022/05/18102556/GettyImages-1284635693.jpg?auto=webp&fit=crop&width=230&height=150)
![Image of a person holding onto a house](https://www.bankrate.com/brp/2024/02/08092753/Homes-Adjustable-rate-mortgages-What-they-are-and-how-they-work-300x169.jpg?auto=webp&fit=crop&width=230&height=150)
![Illustrated collage featuring gears behind a house](https://www.bankrate.com/2023/05/06163545/Homes-Pros-and-cons-of-an-adjustable-rate-mortgage.jpg?auto=webp&fit=crop&width=230&height=150)