When applying for a mortgage, one of the most important decisions you’ll face is choosing between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM). Both options have their advantages and drawbacks, but the best choice depends on your financial situation, risk tolerance, and long-term goals.
In this guide, we’ll break down how fixed and adjustable-rate mortgages work, their pros and cons, and real-life scenarios to help you determine which one saves you more money.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a home loan where the interest rate remains constant throughout the loan’s term, typically 15, 20, or 30 years. This means your monthly mortgage payment will never change, making it easier to budget for the long term.
Pros of Fixed-Rate Mortgages:
Predictable Payments – Your monthly principal and interest payments remain the same. Protection from Rising Interest Rates – You won’t be affected if interest rates increase in the future. Ideal for Long-Term Homeowners – Best for buyers who plan to stay in their home for 10+ years.
Cons of Fixed-Rate Mortgages:
Higher Initial Interest Rates – Compared to ARMs, fixed-rate loans often start with a higher interest rate. Less Flexibility – If interest rates drop, you’d have to refinance to benefit from lower rates.
What Is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an initial period (e.g., 5, 7, or 10 years), after which the rate adjusts periodically based on market conditions. The most common ARMs are 5/1, 7/1, or 10/1, meaning the rate stays fixed for 5, 7, or 10 years before adjusting annually.
Pros of Adjustable-Rate Mortgages:
Lower Initial Interest Rate – ARMs typically offer a lower starting interest rate compared to fixed mortgages. Good for Short-Term Homeowners – If you plan to move before the first adjustment period, you can save thousands. Potential for Lower Rates in the Future – If interest rates decrease, your rate could go down.
Cons of Adjustable-Rate Mortgages:
Uncertainty – After the fixed period, your rate may increase based on market trends. Payment Fluctuations – Your monthly payment may rise significantly over time. Risk of Higher Long-Term Costs – If interest rates rise sharply, you could pay much more over the life of the loan.
Real-Life Example: Comparing Fixed vs. ARM
Let’s compare two borrowers:
Scenario 1: Fixed-Rate Mortgage
- Loan Amount: $300,000
- Interest Rate: 6.0% (fixed for 30 years)
- Monthly Payment: $1,799
- Total Interest Paid Over 30 Years: $347,514
Scenario 2: Adjustable-Rate Mortgage (5/1 ARM)
- Loan Amount: $300,000
- Initial Interest Rate: 4.5% (fixed for 5 years)
- Monthly Payment for First 5 Years: $1,520
- Potential Rate After Adjustment: 7.0%
- Monthly Payment After Year 5: $1,996 (if rates rise)
Who Wins?
- If you stay in your home for 30 years, the fixed-rate mortgage is safer.
- If you sell or refinance within 5-7 years, the ARM saves you thousands in interest.
Which Mortgage Saves You More Money?
If you’re risk-averse and plan to stay long-term, a fixed-rate mortgage is your best bet. But if you’re planning to move or refinance before the fixed period ends, an ARM can save you money in the short term.
For stability? Go fixed. For short-term savings? Consider an ARM.
Final Verdict: Choose the Right Mortgage for Your Future
- A fixed-rate mortgage is ideal if you want predictability and long-term stability.
- An adjustable-rate mortgage is better if you’re comfortable with some risk and plan to move or refinance within a few years.
Thinking about a mortgage? Use our mortgage calculator to see which loan fits your budget best!
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