Fixed-Rate vs. Adjustable-Rate Mortgage: What’s the Difference?

Couple at home discussing and comparing a fixed-rate mortgage vs. an adjustable-rate mortgage (ARM).

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 mortgageAdjustable-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 paidDetermined at the start of the loan.Could increase or decrease depending on how the interest rate adjusts.
Level of riskLower risk.Higher risk.
Monthly paymentThe principal and interest payments remain stable.The principal and interest payments can fluctuate.
PopularityMore 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.

How common are adjustable-rate mortgages?

According to the Consumer Financial Protection Bureau, ARMs historically have been chosen by 25% to 30% of homebuyers. However, ARMs can increase in popularity when interest rates are high, since they offer lower initial rates than fixed-rate mortgages.

How are ARMs and fixed-rate mortgages similar?

Well, borrowers need to meet eligibility requirements to get either an ARM or a fixed-rate mortgage. Lenders will examine:

– Your capacity to repay the loan, which includes your current income and recurring monthly debts.
– Your cash reserves and other sources of capital.
– The value of the property you’re buying.
– Your credit history and score.

ARMs and fixed-rate mortgages also offer the same loan terms — another term for repayment periods — including a 30-year term length.

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