The main difference between a fixed-rate mortgage and an adjustable-rate mortgage, or ARM, is what happens to the interest rate over time.
A fixed-rate mortgage keeps the same interest rate for the entire loan term. An adjustable-rate mortgage keeps its initial rate for a set period, then allows the rate to change according to the loan terms.
Neither structure is automatically the less expensive option. Comparing the actual interest rate, APR, fees and potential future payments can give you a clearer picture of the trade-offs.
ARM vs. Fixed-Rate Mortgage Basics
| Feature |
Adjustable-Rate Mortgage |
Fixed-Rate Mortgage |
| Interest rate |
Fixed initially, then can adjust |
Fixed for the loan term |
| First possible rate change |
Depends on the ARM structure |
No scheduled rate change |
| Principal-and-interest payment |
Can change after the initial period |
Does not change because of market interest rates |
| Future rate calculation |
Generally based on an index plus a margin, subject to caps |
Not applicable |
| Rate caps |
Limit permitted adjustments |
Not applicable |
| Long-term rate certainty |
Limited to the initial fixed-rate period |
Extends through the full loan term |
How a Fixed-Rate Mortgage Works
A fixed-rate mortgage has an interest rate that is set when you take out the loan and does not change during the loan term.
That means the scheduled principal-and-interest payment stays consistent on a standard fully amortizing fixed-rate mortgage. Your total monthly housing payment can still change if property taxes, homeowners insurance, mortgage insurance or escrow requirements change.
Fixed-rate mortgages are available with different repayment terms. A longer term generally spreads repayment across more monthly payments, while a shorter term pays down the balance faster.
The defining feature is rate certainty. Changes in market interest rates do not change the interest rate on an existing fixed-rate mortgage.
How an Adjustable-Rate Mortgage Works
An ARM combines an initial fixed-rate period with an adjustable period later in the loan.
A 5/1 ARM, for example, keeps its initial interest rate for five years and can adjust annually afterward. A 7/6 ARM keeps its initial rate for seven years and can adjust every six months after that.
Once the adjustable period begins, the rate is generally calculated using a market-based index plus a margin. The index can change with market conditions, while the margin is established in the loan agreement and generally does not change after closing.
ARMs also have rate caps that limit how much the interest rate can change. These commonly include limits on the first adjustment, subsequent adjustments and the total change allowed over the life of the mortgage.
Key Differences Between ARMs and Fixed-Rate Mortgages
Interest-Rate Stability
A fixed-rate mortgage provides the same interest rate for the entire loan term. An ARM provides that certainty only during its initial fixed-rate period.
After that period, an ARM's rate can rise or fall according to its index, margin, caps and other loan terms.
Payment Predictability
A fixed-rate mortgage provides greater predictability for principal and interest because market rate movements do not change the loan's interest rate.
An ARM's principal-and-interest payment can change after the initial period. The amount and timing of those changes depend on the adjustment schedule and the loan's contractual limits.
Initial Pricing
ARMs and fixed-rate mortgages can be priced differently, but an ARM is not guaranteed to start with a lower rate or payment.
Compare the actual interest rate, APR, points, lender fees and other terms available to you rather than assuming one structure is cheaper based on the loan type alone.
Future Interest-Rate Risk
A fixed-rate borrower is protected from future market-rate increases on the existing mortgage. The trade-off is that a decline in market rates does not automatically lower the rate on that loan.
With an ARM, future adjustments can move the rate up or down. Rate caps limit those changes but do not eliminate the possibility of a higher payment.
Pros and Cons of an Adjustable-Rate Mortgage
Potential Advantages of an ARM
- Initial fixed-rate period: The rate remains unchanged for a set number of years before adjustments can begin.
- Different term structures: ARMs can provide different initial periods and adjustment schedules.
- Potential pricing difference: Depending on market conditions and lender pricing, an ARM may have different initial terms than a fixed-rate mortgage.
- Rates can decrease: The adjusted rate may fall if the underlying index declines and the loan terms allow it.
Potential Disadvantages of an ARM
- Future payment uncertainty: Principal and interest can increase once the adjustable period begins.
- More terms to evaluate: The index, margin, caps, adjustment frequency and any rate floor affect how the mortgage works later.
- Future plans are uncertain: Selling or refinancing before the first adjustment is not guaranteed.
Pros and Cons of a Fixed-Rate Mortgage
Potential Advantages of a Fixed-Rate Mortgage
- Interest-rate certainty: The rate does not change during the loan term.
- Predictable principal and interest: Market interest-rate changes do not alter the scheduled principal-and-interest payment.
- Simpler long-term planning: There are no future adjustment dates, indexes or rate caps to account for.
Potential Disadvantages of a Fixed-Rate Mortgage
- No automatic benefit from falling rates: A decline in market rates does not reduce the interest rate on the existing mortgage.
- Pricing can differ from ARM options: Depending on current market conditions, an available ARM may have different initial pricing.
How to Compare an ARM With a Fixed-Rate Mortgage
The loan type is only the starting point. Compare the actual offers available to you and consider how each mortgage would work both now and later.
Compare the Rate, APR and Fees
Look at the interest rate, APR, points, lender fees and other closing costs. An initial rate alone does not show the full cost of either mortgage.
A Loan Estimate gives you standardized information that can make it easier to compare those terms across offers.
Consider How Long You May Keep the Mortgage
Your expected timeline can affect how relevant the adjustable period is. If you still have an ARM when its initial period ends, the rate can begin changing according to the loan terms.
Plans to move or refinance can change. When comparing mortgages, consider the possibility that you may keep the loan longer than expected.
Review the ARM's Adjustment Terms
If you are comparing an ARM, review its index, margin, first adjustment date, adjustment frequency and rate caps.
Those terms determine when the rate can change and limit how far it can move. The maximum possible principal-and-interest payment can be especially useful when evaluating whether the mortgage would remain affordable after an adjustment.
Consider Your Budget if the ARM Adjusts
Do not compare an ARM with a fixed-rate mortgage based only on the initial payment. Consider what your budget would look like if the ARM payment increased later.
An ARM risk calculator can illustrate how different rate changes could affect principal and interest after the initial fixed-rate period.
How Common ARM Structures Compare
Choosing an ARM also means choosing how long the initial rate stays fixed and how frequently adjustments can occur afterward.
Among annual-adjustment ARMs, a 5/1 vs. 7/1 ARM comparison shows the effect of adding two years to the initial fixed-rate period. Longer initial periods can also be compared through 5/1 vs. 10/1 and 7/1 vs. 10/1 ARM structures.
Adjustment frequency creates a separate distinction. A 5/1 vs. 5/6 ARM comparison keeps the same five-year initial period but changes the later adjustment schedule from annual to every six months.
For six-month-adjustment loans, 5/6 and 7/6 ARMs differ primarily in whether the first possible adjustment comes after five or seven years.
Bottom Line
A fixed-rate mortgage keeps the same interest rate for the full loan term, while an ARM combines an initial fixed-rate period with possible rate adjustments later.
The comparison should be based on the actual rate, APR, fees and loan terms available to you. If you are considering an ARM, also account for the adjustment schedule, index, margin, caps and potential future payment rather than relying on an expected sale or refinance.
Frequently Asked Questions
What Is the Difference Between a Fixed-Rate and Adjustable-Rate Mortgage?
A fixed-rate mortgage keeps the same interest rate for the entire loan term. An adjustable-rate mortgage starts with an initial fixed-rate period and can change at scheduled intervals afterward.
Is an ARM Always Cheaper Than a Fixed-Rate Mortgage?
No. An ARM may be priced differently from a fixed-rate mortgage, but it is not guaranteed to have a lower initial rate or payment. Compare the actual interest rate, APR, fees and other loan terms available to you.
Can an ARM Payment Increase?
Yes. If the interest rate rises after the initial fixed-rate period, the principal-and-interest payment can also increase. Rate caps limit how much the interest rate can change under the loan terms.
Can an ARM Payment Decrease?
It can. If the underlying index declines, the adjusted rate and principal-and-interest payment may decrease, depending on the margin, caps, any applicable floor and other loan terms.
Can a Fixed-Rate Mortgage Payment Change?
The scheduled principal-and-interest payment on a standard fixed-rate mortgage does not change because of market interest rates. Your total housing payment can still change if property taxes, homeowners insurance, mortgage insurance or escrow requirements change.
Can You Refinance an ARM Into a Fixed-Rate Mortgage?
Yes, if you qualify for a new mortgage. Refinancing an ARM into a fixed-rate mortgage replaces the existing loan and can involve closing costs, so the new rate, loan terms and costs affect the comparison.
Should You Choose an ARM if You Plan to Move Before It Adjusts?
Your expected timeline can be part of the comparison, but moving before the first adjustment is not guaranteed. Consider whether you could still afford the mortgage if your plans change and you keep the ARM into its adjustable period.
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