Comparing Adjustable-Rate Mortgages vs. Fixed-Rate Mortgages

What Are Fixed-Rate Mortgages (FRMs)?

A Fixed-Rate Mortgage is a loan where the interest rate remains the same for the entire life of the loan.

A monthly mortgage payment typically consists of principal, interest, taxes, and insurance.

If you have a fixed rate, the principal and interest portion of your monthly payment will never change.

However, taxes and insurance may increase over the years, which could lead to a gradual increase in your overall payment.

What Are Adjustable-Rate Mortgages (ARMs)?

An Adjustable-Rate Mortgage is a loan where the interest rate can change over time. There may be an initial fixed period, but after that period expires, the interest rate can fluctuate based on market conditions.

Lenders typically offer an introductory rate on ARMs that is lower than the rate for a Fixed-Rate Mortgage. This allows consumers to benefit from a lower initial payment, but lenders anticipate recovering lost initial revenue through future rate increases.

Fixed-Rate vs. Adjustable-Rate: A Side-by-Side Comparison

Historically, borrowers could expect an Adjustable-Rate Mortgage to have an interest rate at least 0.5% lower than that of a Fixed-Rate Mortgage. For example, on a 30-year mortgage with a loan amount of $300,000:

What to Consider When Choosing Between an ARM and an FRM

With a Fixed-Rate Mortgage, the rate never changes, making it a predictable and stable option.

Most Adjustable-Rate Mortgages offer an initial fixed-rate period before the rate becomes adjustable. Common ARM options include 5, 7, and 10-year fixed periods.

For example, with a 5-Year ARM, the interest rate remains the same for the first five years of the loan term. After that, the rate could adjust up or down based on market conditions and the specific rules of the loan.

When selecting an ARM, borrowers must understand key terms and conditions, including:

Why Adjustable-Rate Mortgages Are Not Currently More Attractive Than Fixed-Rate Mortgages

In the current market, lenders anticipate that interest rates will continue to decrease.

Typically, banks offer lower introductory rates on ARMs because they expect to recover their revenue through future rate increases.

However, if rates are expected to decline, banks may not be able to make up for the initial lower rate.

Additionally, banks prefer long-term, stable payments rather than frequent refinancing, which is more likely with ARMs.

As a result, most institutions currently offer Fixed-Rate Mortgages at slightly better rates than ARMs.

Speak with a Mortgage Expert to Find the Right Loan

Choosing between a Fixed-Rate Mortgage and an Adjustable-Rate Mortgage depends on various factors, including your financial situation, risk tolerance, and how long you plan to keep the home.

While ARMs have historically offered lower initial rates, the current market conditions make Fixed-Rate Mortgages the more attractive option for most borrowers.

Understanding the differences between these loan types can help you make an informed decision that aligns best with your financial goals.

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