How to Decide Between Fixed-Rate and Adjustable-Rate Mortgages

Buying your first home is a thrilling experience, but the mortgage world can be overwhelming. Of all the decisions you will have to make, whether to employ a fixed-rate mortgage or an adjustable-rate mortgage (ARM) is one of the most important. Both have pros and cons, and the best for you will depend on your

If you’re unsure which type of mortgage suits you best, this guide will tell you the differences, the pros and cons of each. You’ll be informed with facts to make a decision by the end of reading it.

Learning About Fixed-Rate Mortgages (FRMs)

A fixed-rate mortgage is easy and predictable. With this kind of loan, your interest rate is locked in for the life of the loan, and thus your monthly payments are not changed. This aspect makes FRMs attractive to those who want financial predictability.

Fixed-Rate Mortgage Features:

Monthly Payments Don’t Change: Most suitable for budgeting since there are no surprises.
Long-Term Predictability: Even if market interest rates rise, your rate is fixed.
Terms Shared with Loans: Usually offered as 15-year or 30-year mortgages, of which the 30-year is by far the most common.

For Whom Are Fixed-Rate Mortgages Best?

Buyers who intend to remain in their house for long periods of time (10+ years).
Buyers who like to have predictable budgets and do not want to take on market risk.
Buyers who anticipate interest rates rising in the short run.

Example Situation: John and Sarah are newlyweds with fixed incomes. They plan to stay in their home for the next 20 years and prefer to have a clear idea of how much they will be paying each month. To them, the fixed-rate mortgage is comforting.

What Are Adjustable-Rate Mortgages (ARMs)?

An adjustable-rate mortgage starts off with a fixed rate of interest for a temporary duration (generally 5, 7, or 10 years), and thereafter varies periodically based on the market rate. Although ARMs typically offer lower initial interest rates than fixed loans, they are not completely without uncertainty.

Key Features of ARMs:

Lower Initial Rates: Typically lower than fixed loans, which is perhaps a short-term advantage.
Adjustment Periods: The interest rates change once the initial fixed rate period is over.
Rate Caps: ARMs typically have caps on how much rates are allowed to shift in the long term to protect borrowers from extreme fluctuations.

Who May Want to Consider Adjustable-Rate Mortgages?

Purchasers who will refinance or sell their house before the expiration of the initial fixed-rate period.
Those confident that their incomes will increase over the next few years, thereby cushioning future rate increases.
Individuals who are at ease with market risk for possible savings.

Example Situation: Lisa is a professional woman who will be buying her first condo. She anticipates relocating because of a job transfer within 5 years. A 5-year fixed ARM is most suitable for her, giving her the lowest possible rate for the duration she will be in the property.

A Side-by-Side Comparison

To help you more with your choice, here is a summary side-by-side chart of fixed-rate and adjustable-rate mortgages:

Feature	Fixed-Rate Mortgage	Adjustable-Rate Mortgage
Interest Rate	Fixed throughout the loan term	Variable; fixed for an initial period, then adjusts annually
Monthly Payments	Stable and predictable	Fluctuating after the fixed-rate period
Best For	Long-term homeowners, low-risk tolerance	Short-term homeowners, high-risk tolerance
Benefits	Stability, predictability	Lower initial rates, potential cost savings
Risks	Higher starting rates	Rate increases after adjustment period

Factors to Consider Before You Decide

Choosing a mortgage isn’t so much about saving you money—it’s about obtaining the correct mortgage for your life goals and financial situation. Keep in mind the following:

How Long You Plan to Remain

FRMs are best if you’re a long-term resident.
ARMs are best for short-term stays.

Your Risk Tolerance

If you despise financial unpredictability, opt for the predictability of an FRM.
If you can afford to take a risk in hoping to save, an ARM could be appropriate.

Recent Market Trends

At low interest rates, it’s generally best to take a fixed rate.
When rates are high, starting at a lower ARM rate will save you money in the short run.

Your Current Financial Situation and Future Plans

An increasing or stable income can offset the risks of ARMs.
If you have a fixed income or are close to retirement, FRMs provide more predictable options.

Your Flexibility to Change Your Budget

Will your budget allow you to adapt to higher payments if your ARM rate increases? If not, choose a fixed-rate option.

Additional First-Time Buyer Advice

The following are additional tips to keep in mind while you shop for your mortgage:

Consult a Financial Planner: Mortgage options have long-term financial implications. Consulting an expert will ensure your plan is aligned with your goals.
Shop Around: Obtain quotes from multiple lenders to compare terms and rates.
Read the Fine Print: Especially for ARMs, understand the adjustment periods, rate caps, and payment ceilings.

The Bottom Line

Choosing between an adjustable-rate and a fixed-rate mortgage is daunting, but it’s just what is in your best interest and financial plan. If you need security most of all, then a fixed-rate mortgage is perfect for you. If you’re relocating in a few years or wish to benefit from the lower introductory rate, then an ARM could be the intelligent option.

Remember, a home purchase is a significant money choice. Make sure to take the time to educate yourself, weigh your options, and don’t hesitate to seek out professionals for guidance.

Take the Next Step

Fixed or adjustable, be in the know. Curious about how your monthly payment would be for both? Test this mortgage calculator and find out.

Don’t stop here—go to our Mortgage Resource Center to learn more about turning that dream home into a reality.