Fixed-Rate vs Adjustable-Rate Mortgages: Which Is Better for You

Introduction

Choosing between a fixed-rate and adjustable-rate mortgage is one of the most consequential decisions in the home buying process, since it affects your monthly payment predictability for years or even decades to come.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage locks in the same interest rate for the entire loan term, meaning your principal and interest payment stays the same from the first payment to the last.

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage, often called an ARM, typically starts with a lower fixed rate for an initial period before adjusting periodically based on market conditions, which can cause payments to rise or fall over time.

Key Differences

When a Fixed-Rate Mortgage Makes Sense

If you plan to stay in the home long-term and prioritize predictable payments, a fixed-rate mortgage removes the uncertainty of future rate changes affecting your budget.

When an Adjustable-Rate Mortgage Makes Sense

If you plan to sell or refinance before the adjustable period begins, or expect rates to decline, an ARM's lower initial rate could result in real savings during the fixed introductory period.

Risks to Understand With ARMs

• Payments can increase significantly once the adjustable period begins, depending on market rates.
• Budgeting becomes harder without knowing your exact future payment.
• Refinancing before the adjustment period isn't guaranteed to be available or affordable later.

Frequently Asked Questions

Can I refinance from an ARM to a fixed-rate mortgage later?

Yes, many homeowners refinance before the adjustable period begins, though refinancing depends on your credit, home equity, and market rates at that time.

How often do ARM rates adjust?

This depends on the specific loan terms, with common structures adjusting annually after an initial fixed period, though exact schedules vary by loan.

Is an ARM riskier than a fixed-rate mortgage?

Generally yes, since your payment isn't locked in for the full term, though the risk depends heavily on how long you plan to stay in the home.

Conclusion

Fixed-rate and adjustable-rate mortgages serve different homeowner situations rather than one being universally superior. Your expected time in the home and comfort with payment uncertainty should guide which option fits your situation better.