What Is the Difference Between Fixed-Rate and Adjustable-Rate Mortgages?

Are you considering buying a home? If so, you’ll likely need a mortgage to help finance your purchase. Home loans come in many forms to accommodate different financial situations, including fixed-rate and adjustable-rate mortgages. Depending on the type of loan you secure, you can expect to repay it in monthly installments over the next 15 to 30 years. Learn more about fixed-rate vs. adjustable-rate mortgages to help you decide which one is best for you. 

What Is a Fixed-Rate Mortgage? 

With a fixed-rate mortgage, your interest rate never changes for the life of the loan. The rate your lender offers today will remain unchanged for the loan term length — assuming you don’t refinance your mortgage. As a result, your monthly payments will remain consistent, no matter how the market changes.  

Benefits of a Fixed-Rate Mortgage 

A majority of homebuyers opt for a fixed-rate mortgage. Here are some reasons to choose this type of home loan right now: 

• Mortgage rates are at historic lows. While the rate you qualify for depends on your credit score, income, debt, and down payment amount, both fixed and adjustable rates are historically low at this time.  
• If rates increase in a few years, you’ll keep your low rate. The sputtering economy is expected to keep interest rates low through at least 2023. Then, once the pandemic is behind us, interest rates can only go in one direction — up. If you lock in a fixed rate now, you’ll get to keep it for the next 15 to 30 years, even if rates go up for new homebuyers. 
• Predictable payments provide peace of mind. Many people value the stability of a fixed-rate mortgage. Even if other home-related payments, such as private mortgage insurance and property taxes increase, you can rest assured that your mortgage payments will remain the same from year to year. 

What Is an Adjustable-Rate Mortgage? 

An adjustable-rate mortgage (ARM) has variable interest rates that adjust on a predetermined schedule. Lenders typically offer a low introductory rate, which can increase over the life of the loan. 

ARMs come in many forms, the most popular of which is a hybrid ARM. Of the various hybrid ARM options, the most common is the 5/1 ARM. This loan locks in your rate for the first five years, adjusting once a year after that for the remainder of the loan term. Some ARMs adjust less often than once a year, such as the 3/3 and 5/5 ARM, which change rates every three and five years, respectively. 

Once the low-rate introductory period is over, the loan adjusts to reflect current market conditions. This means adjustable-rate mortgages are subject to interest-rate risk, or the possibility that the rate will increase with each adjustment.  

ARMs have an interest rate cap to limit how much interest can change from year to year or over the life of the loan. Still, depending on the rate cap structure, your monthly payments could double after just a few years — or they could drop below what you started with. That’s the risky nature of an adjustable-rate mortgage. 

Benefits of an Adjustable-Rate Mortgage 

Historically, ARMs have offered some major benefits. Here’s why some borrowers consider getting an adjustable-rate mortgage: 

• You can save during the introductory period. ARMs can be a wise choice if you plan to move a few years after buying your home. You’ll save on interest payments by getting approved for a lower rate and be out of the house before the rate has a chance to increase. 
• You may snag a lower rate when the mortgage adjusts. Even if you plan to be in your home for many years, you may save in the long run if rates decrease in the future. This is most likely to occur if you take out a mortgage when interest rates are high. 
• You might qualify for financing to purchase a more expensive property. A lower intro rate may help you stretch your budget so you can buy a nicer home. Just remember the interest-rate risk you’re taking on as you make your decision. 

Types of Mortgage Loans that Can be Either Fixed or Adjustable 

Home loans are categorized based on the size of the loan and whether they are part of a government program. Many types of mortgages come with different interest rate structures. Consider which ones are available with fixed and adjustable rates: 

• Conventional home loans: Fixed-rate and adjustable-rate mortgages are available 
• FHA home loans: Fixed-rate and adjustable-rate mortgages are available 
• VA loans: Fixed-rate and adjustable-rate mortgages are available 
• Section 184 Native American home loans: Fixed-rate loans of 30 years or less are available 
• USDA home loans: Only 30-year fixed-rate mortgages are available 

The Bottom Line 

With interest rates as low as they are, a fixed-rate mortgage is probably the better deal. After all, there’s a good chance your rate will increase down the road if you take out an adjustable-rate mortgage right now. 

Still, everyone’s situation is different, so it’s possible an ARM could be the right fit for you. If you’re considering an ARM, ask your lender about the specific rates you can qualify for if you choose a fixed-rate vs. adjustable-rate mortgage to help you make your decision.