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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 account for 18.6% of the dollars going to conventional, single-family mortgages in April 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.
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 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.
An ARM 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.
The biggest difference between a fixed-rate mortgage and an ARM is that, with the former, your monthly principal and interest payment stay constant. With an ARM, the payment changes after the introductory period is over.
The other key differences include:
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:
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’s all up to 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.
Fixed-rate mortgages and adjustable-rate mortgages aren’t entirely different animals. These two types of loans have some components in common:
There’s no right or wrong answer between 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 safer for borrowers.
Still, one type of loan might be a better fit over the other. Here’s what to consider.
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