Fixed vs. Adjustable-Rate Mortgage: How to Choose
The choice between a fixed-rate and an adjustable-rate mortgage comes down to a trade-off: certainty for the whole loan, or a lower rate now in exchange for uncertainty later.
Fixed-rate mortgages
The interest rate never changes, so your principal and interest payment is the same from the first month to the last. The most common terms are 30 and 15 years.
- Pros: predictable payments; protection if rates rise.
- Cons: a higher starting rate than a comparable ARM; if rates fall, you only benefit by refinancing, which has costs.
Your total monthly payment can still change, because property taxes and homeowners insurance paid through escrow are adjusted over time.
Adjustable-rate mortgages (ARMs)
An ARM starts with a fixed rate for an initial period, then adjusts at set intervals.
Reading the name. In a 5/1 ARM, the rate is fixed for 5 years and then adjusts once a year. In a 7/6 ARM, it is fixed for 7 years and then adjusts every 6 months.
How the new rate is set. After the fixed period, the rate equals an index, commonly SOFR, plus a fixed margin set by the lender.
Caps limit the changes. A cap structure of 2/1/5, for example, means the rate can rise at most 2 points at the first adjustment, 1 point at each later adjustment, and 5 points over the life of the loan.
- Pros: a lower initial rate and payment; you benefit automatically if rates fall.
- Cons: payments can rise substantially after the fixed period.
How much could the payment change?
For a $320,000 loan over 30 years:
| Interest rate | Principal & interest |
|---|---|
| 5.5% | $1,817 |
| 6.5% | $2,023 |
| 7.5% | $2,237 |
| 8.5% | $2,461 |
Each point adds a little over $200 a month. Before choosing an ARM, calculate the payment at the lifetime cap and ask whether you could manage it.
30-year vs. 15-year fixed
A 15-year loan usually carries a lower rate and builds equity much faster, but the payment is considerably higher. On $320,000 at 6.5%, the 30-year payment is $2,023 and total interest is about $408,000. A 15-year loan at 5.75% costs $2,657 a month, with total interest of about $158,000.
When each one tends to fit
A fixed rate often suits you if:
- You plan to stay in the home for many years.
- Your budget has little room for a higher payment.
- You value certainty over the lowest possible starting rate.
An ARM may suit you if:
- You expect to sell or refinance before the fixed period ends.
- Your income is likely to rise.
- The initial rate is meaningfully lower than the fixed rate and you could afford the capped payment.
Questions to ask about any ARM
- What are the index and the margin?
- What are the initial, periodic and lifetime caps?
- What would my payment be at the maximum rate?
- Is there a prepayment penalty?
Lenders must provide a Loan Estimate that sets out these terms, so you can compare offers side by side.
Results are estimates for informational purposes only and are not financial, tax, legal or medical advice.