The choice between a fixed-rate and adjustable-rate mortgage shapes your monthly payment, your risk exposure, and potentially your total cost of homeownership. There's no universally right answer—the best choice depends on how long you'll keep the loan, your risk tolerance, and where you think interest rates are headed.
Fixed-Rate Mortgages: Stability and Predictability
With a fixed-rate mortgage, your interest rate never changes for the life of the loan. Whether you choose a 15-year or 30-year term, your principal and interest payment stays exactly the same from month one to the final payment. Only property taxes and insurance can change your total housing cost.
This predictability is the primary advantage. You can budget precisely, knowing your mortgage payment won't increase even if rates rise dramatically. If you locked in at 7% and rates climb to 9%, you keep paying 7%. This protection has real value, especially for risk-averse borrowers or those on fixed incomes.
The trade-off is that fixed rates are typically higher than initial ARM rates. Lenders charge a premium for the guarantee that your rate won't change. If rates stay flat or decline, you'll pay more than you would have with an ARM—unless you refinance, which has its own costs.
Fixed-rate mortgages work best when you plan to stay long-term and value payment certainty. If you're buying your forever home or expect to be there 10+ years, fixed-rate provides peace of mind.
Adjustable-Rate Mortgages: Lower Start, More Risk
Adjustable-rate mortgages (ARMs) offer a lower initial rate that's fixed for a set period, then adjusts periodically based on market conditions. The most common ARMs are 5/1, 7/1, and 10/1—the first number indicates years of fixed rate, the second indicates how often it adjusts afterward.
A 5/1 ARM might start at 6% while the 30-year fixed is at 7%. For the first five years, you enjoy that lower rate and lower payment. After year five, the rate adjusts annually based on an index (like SOFR) plus a margin. If rates have risen, your payment increases; if they've fallen, it decreases.
ARMs include caps limiting how much your rate can change: initial adjustment caps (typically 2%), periodic caps (usually 2% per adjustment), and lifetime caps (often 5% above the initial rate). On a 6% ARM with a 5% lifetime cap, your rate can never exceed 11%. This provides some protection, but a 5% rate increase would dramatically raise your payment.
ARMs work best when you're confident you'll sell or refinance before the adjustable period begins. If you know you'll move in four years, a 5/1 ARM saves money with no adjustment risk. They're also valuable when rates are high and expected to fall—you get a lower starting rate and can refinance to fixed when rates drop.
How to Decide: Key Questions
How long will you keep this loan? This is the crucial question. If you'll sell or refinance within the ARM's fixed period, the lower rate is essentially free money. Calculate how much you'd save monthly with the ARM rate, multiply by months in the fixed period, and that's your potential savings.
Can you afford higher payments? If the ARM adjusts to its maximum rate, could you still make the payment? If not, you're betting on being able to refinance or sell—bets that don't always work out as planned.
What's the rate difference? Sometimes the gap between fixed and ARM rates is minimal (0.25%), making the ARM's risk not worth the small savings. Other times the gap is substantial (0.75% or more), creating meaningful savings during the fixed period.
Where do you think rates are headed? If rates seem likely to rise, locking a fixed rate protects you. If they seem likely to fall, an ARM lets you benefit without refinancing costs. Of course, predicting rates is notoriously difficult.
In Today's Rate Environment
The right choice shifts with market conditions. When fixed rates are historically low (as they were in 2020-2021), locking in long-term makes obvious sense. When rates are high and potentially declining, ARMs become more attractive.
Consider hybrid strategies. Some borrowers take a 7/1 ARM planning to refinance in year 5-6, aiming to capture initial savings while giving themselves a buffer before adjustments begin. Others choose a 15-year fixed if they can afford it, accepting higher payments for faster payoff and lower total interest.
Use our mortgage calculator to compare payments at different rates. Remember that today's decision isn't permanent—refinancing remains an option if your situation or the rate environment changes.