Fixed-rate vs. adjustable-rate mortgages: What's the difference?

Published April 26, 2021
by Better

Graphic of Two Bold Lines Labeled Adjustable Rate and Fixed Rate

What You’ll Learn

How a fixed-rate mortgage works

How an adjustable-rate mortgage is different

What to consider before choosing your mortgage

Purchasing a home can test even the most decisive buyer’s decision-making skills: Where do you want to live? How much can you afford? How many bedrooms? Should you make an offer this or that house? The list goes on and on. And just when your offer has been accepted, you’re asked, “So, what kind of mortgage are you looking for, a fixed rate or an adjustable rate?”

The answer to this question mainly comes down to your comfort level and plans for living in the home. Here’s what you should know about fixed-rate and adjustable-rate mortgages, and how to decide which loan is right for you.

Fixed-rate mortgage

When you get a fixed-rate mortgage, your interest rate stays the same for the life of the loan. Whether you have a 10-year, 15-year, 20-year, or 30-year mortgage, a fixed rate means exactly that: Your interest rate will never change, regardless of what happens in the market. For example, if you take a 30-year, fixed-rate mortgage at 4%, your interest rate won't rise, even if home loan rates climb to 5% or 6%. The same is true if rates begin to fall. For example, if you lock in an interest rate at 4%, and rates later drop, then you’ll still be required to pay your same fixed rate. Luckily, if this does occur, you may still have options to save money.

In this instance, if you qualify for a mortgage refinance, you could apply for a new loan with a lower interest rate and replace your original mortgage. However, there are costs associated with refinancing, so you’ll want to weigh your monthly savings to your upfront costs to ensure it makes sense at that time.

With that said, interest is just one part of your mortgage payment—which could still increase due to other factors related to property taxes or homeowners insurance escrows. For example, if your city or county hikes property taxes or your insurance premiums go up, your principal (the amount your borrowed) and interest won’t change, but your monthly mortgage payments may still increase. Still, for predictable payments, a fixed-rate mortgage may be better than an adjustable-rate mortgage, which we will cover next.

You can use our fixed-rate loan comparison calculator to see two fixed-rate mortgages side-by-side, including the loan amounts, interest rates, terms, and points or credits.

Adjustable-rate mortgage

An adjustable-rate mortgage, or ARM as it’s more commonly called, has an interest rate that may change over time. Typically, an ARM starts with a fixed rate for a set period, followed by a phase when your interest rate can shift up or down according to market conditions. While shopping for mortgages, you will typically see an ARM expressed similar to a fraction, such as 5/6m, 7/6m, or 10/6m ARM. Here’s what those numbers mean:

  • First number: The ARM’s introductory fixed-rate period in years or months
  • Second number: How often your ARM’s interest rate may change in years after the fixed period ends

For example, if you have a 5/6m ARM, your interest rate will stay the same for five years. After that period ends, the rate may fluctuate every 6 months for the rest of your loan.

The advertised interest rates of ARMs may be enticing, as they are often lower than those for fixed-rate mortgages. However, remember that an adjustable mortgage could also be a bit of a gamble. That’s because if mortgage rates rise according to market conditions after the fixed term is up, then your payments may increase, too. On the bright side, if rates decrease, you could reap the benefits of lower rates without having to refinance.

If interest rate fluctuations make you feel uneasy, then there is good news: ARMs have interest rate caps which will limit how high or low your rates can go. You may see caps for your first rate change and future changes, along with a lifetime cap.

Like a fixed-rate mortgage, you may have the option to refinance your ARM to a lower fixed-rate loan if you choose. But there are no guarantees you will qualify, so think about how high your interest rate could go. If your plans change, consider if you’ll be able to afford an ARM long-term.

Compare your interest rate options

Fixed rate Adjustable rate
Lower risk, no surprises Higher risk, uncertainty
Higher interest rate Lower interest rate to start
Rate does not change After initial fixed period, rate can increase or decrease based on the market
Monthly principal and interest payments stay the same Monthly principal and interest payments can increase or decrease over time

What to consider before choosing your mortgage

While most homeowners opt for a fixed-rate mortgage, it doesn’t necessarily have to be your default pick. You'll want to weigh the pros and cons of each option. Here are some questions that may help you come to the right decision for your needs.

How long do you plan to stay in the home?

It can be tough to predict exactly what you’ll be doing in the next 5 or 10 years, but knowing where you’ll be living could have a significant impact on your wallet. If you want to put down roots and buy a forever home, you may like the long-term stability of a fixed-rate mortgage. More predictable payments may make it easier to budget and save for other financial goals.

On the other hand, if you expect to relocate for work or plan to upgrade to a larger home in a few years, an ARM could potentially save you money. If you sell or refinance before the end of the introductory period, you won't have to worry about interest rate changes. But it's critical to understand the terms of an ARM in case you wind up being unable to sell or refinance your home when you plan.

Be sure to find out the following from your lender before applying for an adjustable-rate loan:

  • When is the soonest your interest rate could go up?
  • How high could your interest rate increase?
  • How often could your rates rise?
  • How high could your mortgage payment be?
  • What are the caps on interest rate changes (up and down)?

Where are mortgage rates currently?

When interest rates are generally high, you could score a deal by snagging the lower introductory rates of an ARM. But when interest rates are historically low, the opposite is true. With less of a spread between fixed-rate mortgages and ARMs, and future rates less likely to go down, you may be better off locking in a low fixed-rate mortgage while you can.

If you’re unsure where rates currently stand, talk to your lender about historical trends and which direction rates are likely to head over time. However, keep in mind that a licensed loan officer cannot guarantee where rates are headed.

Simplify your decision with Better Mortgage

If you're still unsure about whether to choose a fixed-rate or adjustable-rate mortgage, Better Mortgage can help make the decision easier. Our 100% online mortgage application will save you time without pressure from loan officers eager to earn a commission. Plus, we have no unnecessary appointments.

Ready to get started? You can see customized rates in less than one minute or get pre-approved for a mortgage in less than 3 minutes. Better Mortgage makes it easy to see how much you can afford and Better Real Estate can help you find a real estate agent.

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