Fixed vs. Adjustable-Rate Mortgages: Which Is Right for You?

Choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is one of the biggest decisions in buying a home. The right answer depends on how long you plan to stay, how much payment risk you can handle and where rates are when you borrow.

How a fixed-rate mortgage works

The interest rate stays the same for the entire loan, most commonly 30 or 15 years. Your principal-and-interest payment never changes, which makes budgeting simple. If rates fall later, you can refinance; if they rise, you are protected.

How an ARM works

An ARM has an introductory fixed period, often 5, 7 or 10 years, written as a 5/6 or 7/6 ARM. After that, the rate resets periodically based on a benchmark index such as SOFR plus a fixed margin. Caps limit how much the rate can rise at the first adjustment, at each later adjustment and over the life of the loan.

Pros and cons at a glance

• Fixed: predictable payments and no reset risk, but usually a higher starting rate than an ARM.
• ARM: lower initial rate and payment, but payments can rise significantly after the intro period.

When an ARM can make sense

• You expect to sell or refinance before the fixed period ends.
• You have room in your budget to absorb the maximum possible payment allowed by the caps.
• The gap between ARM and fixed rates is wide enough to produce meaningful savings.

Questions to ask your lender

1. What index and margin does the ARM use?
2. What are the initial, periodic and lifetime caps?
3. What would my payment be at the lifetime cap?
4. Are there prepayment penalties?

The bottom line: if you value certainty or plan to stay long term, a fixed rate is the safer choice. An ARM is a calculated bet that works best with a clear exit plan.

This guide is for general information only and is not financial advice. See our Disclaimer.