Fixed vs. Adjustable-Rate Mortgages
A fixed interest rate is always the same. An adjustable rate is subject to change over time. Compare 15, 20 and 30-year fixed terms with 5/1, 7/1 and 10/1 adjustable-rate mortgages (ARMs).
- 15 · 20 · 30-year fixed
- 5/1 · 7/1 · 10/1 ARM
- Rate caps on ARMs
- Side-by-side comparison
Fixed or Adjustable: How They Compare
An adjustable rate is one that is subject to change over time. A fixed interest rate, on the other hand, is always the same.
15, 20, 30 yearFixed-Rate Mortgage
A fixed interest rate is always the same. Your principal and interest payment stays the same for the whole loan term, so you know exactly how much you'll be paying each month.
5/1, 7/1, 10/1Adjustable-Rate Mortgage (ARM)
A house loan with a low beginning rate that changes over time based on an index rate. It has an interest rate that varies at regular intervals, such as once a year.
| Side by side | Fixed rate | Adjustable rate (ARM) |
|---|---|---|
| Interest rate | Always the same for the life of the loan | Low beginning rate, then changes at regular intervals based on an index rate |
| Terms | 15, 20 or 30 years | 5/1, 7/1 or 10/1: first adjustment after 5, 7 or 10 years, then annually |
| Payments | Principal and interest stay the same for the whole term | Can rise or fall after the first adjustment; the rate can’t increase beyond the cap limit |
| Protection | You’re protected in the event interest rates rise | Rates may decrease over time, allowing you to save money |
| Often best for | Homeowners who want security, consistency and stable payments for the long term | Borrowers who plan to stay in their house for a shorter period of time or refinance before the introductory rate period expires |
What Is an Adjustable-Rate Term?
Adjustable rates are usually based on a baseline that defines how much they change. It has an interest rate that varies at regular intervals, such as once a year. Economic considerations might cause the rate to rise or fall. It's a house loan with a low beginning rate that changes over time based on an index rate.
What does 5/1, 7/1, 10/1 mean?
First adjustment after five years, then adjusts annually
First adjustment after seven years, then adjusts annually
First adjustment after 10 years, then adjusts annually
How Do Adjustable Rates Work?
There is an amortization schedule for every mortgage. This is a schedule that shows how much of your monthly payment is interest and how much is principal. In most circumstances, when the mortgage is paid off over time, the payments cover a larger portion of the loan's principal. Certain ARM loan options, such as interest-only or payment-option ARMs, can result in negative amortization, which means your debt grows over time.
TAG · Fixed & Adjustable Rate Terms
Who Should Consider an Adjustable-Rate Term?
- First-time homebuyers and borrowers who require a lower initial rate to qualify for a mortgage.
- Borrowers who want to leave their home in less than 5 years.
- Borrowers who desire to save and invest the money they save from the lower rates and payments at first.
- Borrowers who expect future stock option vesting/payouts or significant bonus income that can be used to reduce principal.
Adjustable-Rate Term Benefits
Rates may decrease
Rates may decrease over time, allowing you to save money.
Rate caps
Interest rate can’t increase beyond the cap limit.
Easier to qualify
They make qualifying for a mortgage easier.
More buying power
You could be able to afford a larger home. Keep in mind that your payments may increase over time.
Built for shorter stays
Borrowers who plan to stay in their house for a shorter period of time or refinance before the promotional rate period expires would benefit the most.
Lower introductory rate
An ARM's introductory interest rate is usually lower than the market rate. As more of your monthly payment goes toward paying down the principal loan amount, this might be advantageous and help you improve equity faster.
A fixed-rate mortgage can be more expensive than an ARM if you do not plan to own your house for 30 years. Many people who choose an ARM do so because they do not intend to stay in their house long, or they know they will be able to pay off the loan before the rate adjusts.
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Fixed/ Adjustable Rate Term Benefits
- Rates may decrease over time, allowing you to save money.
- Interest rate can’t increase beyond the cap limit.
- The interest rate and monthly payments might.
- They make qualifying for a mortgage easier.
- You could be able to afford a larger home. Keep in mind that your payments may increase over time.
- Borrowers who plan to stay in their house for a shorter period of time or refinance before the promotional rate period expires would benefit the most.
- An ARM's introductory interest rate is usually lower than the market rate. As more of your monthly payment goes toward paying down the principal loan amount, this might be advantageous and help you improve equity faster.
- A fixed-rate mortgage can be more expensive than an ARM if you do not plan to own your house for 30 years. Many people who choose an ARM do so because they do not intend to stay in their house long, or they know they will be able to pay off the loan before the rate adjusts.