Written By Rory Arnold
Reviewed By Grace Lin
The biggest difference between a fixed-rate mortgage and an adjustable-rate mortgage, aka an ARM, is that the interest rate on a fixed-rate mortgage never changes, while the rate on an ARM may go up or down periodically.
If you’re trying to decide between a fixed vs. adjustable rate-mortgage, it’s important to understand the advantages and disadvantages of both types of interest rates. Here’s a rundown of the major differences between the two:
Fixed-Rate vs. Adjustable-Rate Mortgages
| Fixed-rate mortgage | Adjustable-rate mortgage or ARM | |
| Interest rate | – Based on market conditions and locked in when you take out the mortgage. – Stays the same for the life of the loan. | – Starts off lower compared with the interest rate on a fixed-rate mortgage. – Adjusts periodically based on market conditions after the fixed period ends. |
| Total interest paid | Determined at the start of the loan. | Could increase or decrease depending on how the interest rate adjusts. |
| Level of risk | Lower risk. | Higher risk. |
| Monthly payment | The principal and interest payments remain stable. | The principal and interest payments can fluctuate. |
| Popularity | More popular among homebuyers. | Less popular among homebuyers. |
| Makes sense if … | – You want no surprises in your monthly mortgage payment. – You can’t afford increases to your monthly payment. – You plan to live in the same place for long time. – Interest rates are low. | – You’re confident you can afford any increases to your monthly mortgage payment. – You’re more concerned about short-term costs. – You plan to sell your home soon, before the initial fixed period with the lower rate ends. |
FAQ: Adjustable-Rate Mortgage vs. Fixed-Rate Mortgage
Here are the answers to some frequently asked questions about ARMs vs. fixed mortgages.
