Choosing a mortgage isn’t just a box to check. It’s one of the most important financial decisions you’ll make in the homebuying process. Whether you’re buying your first home or refinancing an existing one, understanding the difference between fixed and adjustable-rate mortgages (ARMs) can save you tens of thousands of dollars over the life of the loan.
Let’s break down what each loan type is, how they compare, and why ARMs are making a comeback in today’s high-rate environment.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage means your interest rate (and therefore your monthly principal and interest payment) stays the same for the entire life of the loan. Whether it’s a 15, 20, or 30-year term, the amount you pay doesn’t change, even if the market goes wild.
Key Features:
- Locked-in interest rate for the entire loan term.
- Stable monthly payments—great for budgeting.
- The most common term is 30 years, although 15-year and 20-year options are also available.
Pros:
- Predictability: You always know what you owe.
- Peace of mind: Immune to rising interest rates.
- Easier to budget long-term.
Cons:
- Often comes with a higher starting rate compared to ARMs.
- You pay for that stability, even if rates drop later on.
A fixed-rate mortgage is a bit like a vanilla latte; it might seem like a basic order, but it’s generally a safe bet. The biggest advantage of a fixed-rate mortgage is certainty. You’ll always know your monthly payment, which makes budgeting a lot easier, especially for first-time buyers or those on a strict income. If interest rates rise in the future (as they often do), you’re safely locked into your original, lower rate. The downside? You pay for that peace of mind with a slightly higher initial rate. So, if rates drop, you’d need to refinance to take advantage of the savings. Still, for someone planning to live in their home for the long haul, a fixed-rate loan can be the financially safe bet.
What Is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage offers a lower initial interest rate for a set period, typically 5, 7, or 10 years. After that, the rate adjusts periodically based on a benchmark interest rate (like the SOFR or Treasury index), plus a fixed margin.
So, a “5/6 ARM” means your rate is fixed for the first 5 years and then adjusts every 6 months thereafter.
Key Features:
- Introductory rate is lower than a fixed-rate mortgage.
- Rate adjustments can go up or down after the fixed period ends.
- Rate caps limit how much it can increase in a given period or over the life of the loan.
Pros:
- Lower initial monthly payments mean more buying power.
- Ideal for people who plan to move or refinance within the first few years.
- More flexibility if you’re financially savvy or short-term focused.
Cons:
- The rate can increase significantly after the fixed period.
- Monthly payments can become unpredictable.
- Not ideal if you’re planning to stay in your home long-term.
ARMs are like getting a front-row seat at a discount for a few years. They’re appealing because the starting rate is typically much lower than what you’d get on a 30-year fixed mortgage. That can free up cash for savings, renovations, or simply make your monthly payment more affordable. But the key is timing. After the intro period, your rate could increase based on the market. That means you need to have a clear plan to sell, refinance, or be prepared for higher payments. If you’re someone who knows you won’t be in the house forever, an ARM could be a savvy short-term strategy. However, if you’re in it for the long haul and want peace of mind, a fixed rate is likely the better fit.
Fixed vs. ARM: Side-by-Side Comparison
| Feature | Fixed-Rate Mortgage | Adjustable-Rate Mortgage (ARM) |
| Interest Rate Stability | Fixed for entire term | Fixed initially, adjusts later |
| Initial Interest Rate | Higher | Lower |
| Payment Predictability | High | Variable after intro period |
| Best For | Long-term homeowners | Short-term homeowners or refinancers |
| Risk of Increasing Payments | None | Yes, after intro period |
| Potential for Lower Costs | If rates rise | If rates fall or if sold/refinanced |
Why ARMs Are Getting More Attention in a High-Rate Market
When mortgage rates are low, most borrowers tend to opt for fixed-rate loans. It’s easy, stable, and you lock in a good deal. But in today’s higher-rate environment (think 6.5 to 7.5 percent or more), buyers are getting creative. Enter the ARM comeback.
ARMs offer a lower introductory rate, which can make a significant difference in monthly affordability. For example, if a 30-year fixed rate is at 7.25 percent, a 5/6 ARM might be closer to 6.0 percent, which can save you hundreds each month. If you plan to move, refinance, or upgrade within a few years, that lower rate could mean real money in your pocket before the adjustable period even kicks in.
Homebuyers are also betting that rates will drop in the coming years. If that happens, refinancing out of an ARM before it adjusts could be a smart move. It’s a little more hands-on, but for some buyers, it’s worth the extra strategy.
What’s Right for You?
When deciding between a fixed-rate and an ARM, the right choice comes down to your timeline, risk tolerance, and financial goals:
- Choose a fixed-rate mortgage if you want long-term stability, are planning to stay in your home for 10 or more years, or just don’t want to think about interest rate changes ever again.
- Choose an ARM if you’re comfortable with a little risk, plan to move or refinance before the fixed period ends, and want to take advantage of lower initial payments.
There’s no wrong choice, only the best fit for your lifestyle.
Need help running the numbers or choosing a strategy that fits your situation? Reach out for a free mortgage consultation. We’ll walk through the pros, cons, and projections so you can make a confident and informed decision.