Fixed-rate vs. adjustable-rate mortgage: which is right for you?
The short answer
A fixed-rate mortgage keeps the same interest rate and principal-and-interest payment for the entire loan. An adjustable-rate mortgage (ARM) has a fixed rate for an initial period, commonly 5, 7, or 10 years, then adjusts periodically based on an index plus a margin, within caps. ARMs can start lower and suit people who expect to move or refinance before the fixed period ends; fixed loans suit people who want certainty.
How an ARM is described
A 7/6 ARM has a fixed rate for 7 years, then adjusts every 6 months. After the fixed period, your rate equals an index (usually SOFR) plus a set margin, rounded and limited by caps.
Understanding caps
Caps are often written like 5/1/5: the first adjustment can rise at most 5 points, each later adjustment at most 1 point, and the rate can never exceed the start rate plus 5 points over the life of the loan. Always ask for the worst-case payment.
| Fixed rate | ARM | |
|---|---|---|
| Payment certainty | Complete | Only during the fixed period |
| Starting rate | Usually higher | Often lower, but not always |
| Best for | Staying long term; tight budgets | Moving or refinancing within the fixed period |
| Main risk | Paying more if rates fall (fixable by refinancing) | Payment shock if rates are higher at reset |
Questions to ask before choosing an ARM
- How much lower is the ARM rate than a fixed rate today? If the gap is small, the fixed loan may be the better deal.
- What is my highest possible payment, and could I afford it?
- How likely am I to move, sell, or refinance before the first adjustment?
Common questions
Can I refinance an ARM into a fixed rate?
Yes, as long as you qualify at the time. Plan for that possibility, since rates and your finances can change.
Do ARMs have prepayment penalties?
Most standard residential ARMs do not, but always check your Loan Estimate.