When buying a home, one of the most critical decisions is choosing between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM). Both options have advantages and drawbacks, and selecting the right one can save you thousands in interest payments.
In this guide, we’ll break down how each type works, their pros and cons, and which one is best for your situation.
What is a Fixed-Rate Mortgage (FRM)?
A fixed-rate mortgage has an interest rate that remains constant throughout the loan term. This means your monthly payment stays the same from start to finish, making budgeting more predictable.
How It Works:
✔ You lock in a fixed interest rate when you take the loan.
✔ Your monthly mortgage payment remains the same for 15, 20, or 30 years.
✔ Even if market interest rates increase, your rate won’t change.
💡 Example:
Sarah gets a 30-year fixed mortgage at 5.5% interest. Whether interest rates go up or down in the next 10, 20, or 30 years, she continues paying the same rate.
What is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage starts with a low fixed rate for a set period, then adjusts periodically based on market conditions.
How It Works:
✔ The initial rate is lower than a fixed-rate mortgage for the first 3, 5, 7, or 10 years.
✔ After the fixed period ends, the rate adjusts annually based on market interest rates.
✔ Your monthly payment could increase or decrease over time.
💡 Example:
John takes a 5/1 ARM at 4.5%. His rate stays at 4.5% for the first 5 years, then adjusts every year based on market rates. If rates go up to 6% after five years, his payment increases. If rates drop, he benefits from lower payments.
Key Differences Between Fixed-Rate and Adjustable-Rate Mortgages
| Feature | Fixed-Rate Mortgage (FRM) | Adjustable-Rate Mortgage (ARM) |
| Initial Interest Rate | Higher | Lower |
| Rate Stability | Fixed for the entire term | Changes after fixed period |
| Monthly Payments | Stay the same | Can increase or decrease |
| Best For | Long-term homeowners | Short-term homeowners |
| Risk Level | Low risk | Higher risk |
Pros and Cons of Fixed-Rate Mortgages
✅ Pros of FRM:
✔ Predictable payments – Your monthly mortgage payment remains the same.
✔ Protection from rising rates – If market rates increase, your rate stays fixed.
✔ Easier budgeting – No surprises in mortgage costs.
❌ Cons of FRM:
✖ Higher initial interest rate – You may start with a higher rate than an ARM.
✖ Less flexibility – If market rates drop, you’ll need to refinance to get a lower rate.
💡 Best for: Homebuyers planning to stay in their home for many years who prefer stability.
Pros and Cons of Adjustable-Rate Mortgages
✅ Pros of ARM:
✔ Lower initial rate – Often 0.5% to 1.5% lower than fixed-rate loans.
✔ Lower payments in the beginning – Good for short-term homeowners.
✔ Can save money if rates drop – Your rate can decrease when market rates go down.
❌ Cons of ARM:
✖ Uncertainty – Your rate and payments can increase after the fixed period.
✖ Difficult to budget – Payments may change every year.
✖ Potential for higher costs – If rates rise significantly, you could end up paying much more.
💡 Best for: Homebuyers who plan to sell or refinance within a few years.
Which Mortgage Should You Choose?
Choose a Fixed-Rate Mortgage if:
✔ You plan to live in your home for a long time.
✔ You want stable, predictable payments.
✔ You are buying at a time when rates are already low.
Choose an Adjustable-Rate Mortgage if:
✔ You plan to sell or refinance within 5-7 years.
✔ You want to start with lower payments.
✔ You are comfortable with potential rate increases.
💡 Example Scenarios:
- Mark & Lisa (Long-term buyers): They buy their forever home and don’t want rate surprises, so they choose a 30-year fixed-rate mortgage.
- Tom (Short-term buyer): He plans to sell his home in 5 years, so he chooses a 5/1 ARM to get a lower initial rate.
Final Thoughts: Making the Best Choice for Your Future
The right mortgage depends on your financial goals and how long you plan to stay in your home.
✔ Want stability? → Go with a fixed-rate mortgage.
✔ Want lower initial payments? → Consider an adjustable-rate mortgage.
Before deciding, use our mortgage calculator to compare payments for both options!
Leave a Reply