Fixed Rate vs. Adjustable Rate Mortgage: What's Best for You

If you’re thinking about buying a home, you may be deciding between a fixed rate mortgage and an adjustable rate mortgage (ARM). There is no “one size fits all” when it comes to purchasing a home, and the best option will depend on your needs. Comparing the differences between the two will help you decide on the best fit.

How does a fixed rate mortgage work?

A fixed rate mortgage has an interest rate that remains unchanged throughout the loan’s term. The monthly principal and interest payments stay the same. However, the overall payment may fluctuate due to taxes and homeowners’ insurance, which are also included in many mortgage payments. A fixed rate mortgage is a popular option for many buyers because of its predictability and stability. These loans come in various terms, such as 10, 15, or 30 years. Fixed rate mortgages may have a higher interest rate than the initial interest rate for an adjustable rate mortgage.

How does an adjustable rate mortgage work?

An adjustable rate mortgage (ARM) has an interest rate that changes at set intervals after a fixed-rate introductory period. The interest rate will continue to adjust throughout the life of the loan. The length of the ARM’s fixed-rate period is in the name of the product. For example, with a 5/5 ARM or a 10/1 ARM, the number before the slash refers to how many years the initial rate will be fixed, and the number after the slash refers to the number of years between rate adjustments. A 10/1 ARM has a fixed interest rate for the first ten years, then it changes annually for the remainder of the 30-year term. A 5/5 ARM would have the same interest rate for the first five years, and then the rate would adjust every five years. An ARM will typically have a lower initial interest rate than a fixed rate mortgage.

Choosing between a fixed rate or adjustable rate mortgage

When comparing fixed rate and adjustable rate mortgages, there isn't a clear-cut right or wrong choice — each comes with its pros and cons. Nonetheless, one type of loan might align more closely with your financial needs than the other. 

Reasons to consider a fixed rate mortgage

If you're buying your "forever home" and want this move to be permanent, this might be the right option for you.  Since a fixed rate mortgage offers a fixed interest rate, this is also a good option if you prefer a set interest rate that won’t change over time and predictable budgeting for your monthly expenses. Because it’s possible your interest rate and monthly payment could increase with an adjustable rate mortgage, a fixed rate option might be a better choice if you do not anticipate significant increases in your income in the coming years.

Reasons to consider an adjustable rate mortgage:

An adjustable rate mortgage (ARM) could be a good fit if you plan to move or pay off your mortgage within the next ten years. If you're purchasing your first home and want to enjoy lower payments during the first ten years of your loan and maximize your buying buyer, this may be a better option since an ARM's initial interest rate is typically lower than a fixed rate mortgage. Another time to consider an ARM is if you expect your income to increase in the future, putting you in a better position to handle possible rate increases that can occur with an ARM. Additionally, many ARMs offer reduced or low closing costs and no down payment options.^*

Choosing between a fixed rate mortgage and an ARM depends on your financial situation and long-term goals. Fixed rate mortgages provide the security of stable monthly payments, making them ideal for those who prefer predictability. On the other hand, ARMs offer lower initial rates, which can be beneficial if you plan to move or refinance before any potential rate increases. It’s essential to carefully weigh each option's benefits and drawbacks and discuss the options further with your lender.

Connect with our mortgage team to explore these options further. You can also quickly check rates with our online loan consultant to determine the product and rate that matches your needs.

*Qualification is subject to creditworthiness and rates, terms, and conditions will vary depending on your lender and loan product. Closing costs may vary. Closing costs could include but are not limited to: discount points, loan origination fees, appraisal fees, title search and other title related fees, recording fees, flood certification, underwriting fees, document preparation fees, and attorney closing fee, and may vary depending on the loan amount, mortgage type, creditworthiness, loan to value ratio, and other qualifying or determining factors.