Fixed-Rate vs. Adjustable-Rate Mortgages
One of the most basic mortgage decisions is whether to choose a fixed rate, which stays the same for the life of the loan, or an adjustable rate (ARM), which starts at a set rate for an initial period and then adjusts periodically based on a market index.
Who It Tends to Fit
Fixed-rate loans tend to fit buyers who value predictable payments or plan to stay in the home long-term, while ARMs can fit buyers who expect to move or refinance before the initial fixed period ends and want a potentially lower starting rate.
Key Features
- Fixed-rate: the interest rate and principal-and-interest payment stay constant for the entire term, commonly 15 or 30 years
- ARM: often structured like a '5/1' or '7/1', meaning the rate is fixed for the first 5 or 7 years, then adjusts on a set schedule
- ARMs typically include rate caps limiting how much the rate can increase at each adjustment and over the life of the loan
- ARM rates are tied to a market index plus a margin set by the lender
General Qualifying Factors
- Underwriting is generally similar between fixed and ARM loans, though some lenders qualify ARM borrowers using a higher rate to ensure they could handle future adjustments
- Understanding your own timeline in the home is one of the most important 'qualifying' factors for this decision
- Reviewing the specific caps and adjustment schedule on any ARM before committing
Exact requirements vary by lender and can change over time, so treat the figures above as general starting points rather than guarantees. A licensed loan officer can confirm current guidelines for a specific program.
Costs to Expect
Fixed and ARM loans of the same type otherwise carry similar closing costs; the financial difference mainly plays out over time through the interest rate path rather than upfront fees.
Also Worth Knowing
A lower initial ARM rate can reduce payments during the fixed period, but it's worth planning for the possibility that rates — and your payment — could rise after the adjustment period begins.