A comprehensive comparison of adjustable-rate and fixed-rate mortgages to help you choose the right loan type for your financial situation.
NMHL Team2026-02-0512 min read
Understanding Fixed-Rate Mortgages
A fixed-rate mortgage locks in your interest rate for the entire life of the loan, providing complete payment predictability. Whether you choose a 15-year or 30-year term, your principal and interest payment remains exactly the same from the first month to the last. This stability makes fixed-rate mortgages the most popular choice in the United States, accounting for approximately 90 percent of all new mortgage originations. The primary advantage of a fixed-rate mortgage is protection against rising interest rates. Once you lock in your rate, market fluctuations have no impact on your monthly payment. This makes budgeting straightforward and eliminates the risk of payment shock. Fixed-rate mortgages are particularly attractive during periods of low interest rates, as they allow you to secure that low rate for the duration of your loan. The 30-year fixed-rate mortgage is the most common option, offering the lowest monthly payment spread over the longest term. However, you pay significantly more in total interest compared to shorter terms. A 15-year fixed-rate mortgage has higher monthly payments but builds equity faster and saves tens of thousands of dollars in interest over the life of the loan. Some lenders also offer 10-year, 20-year, and 25-year fixed terms. The main disadvantage of fixed-rate mortgages is that their initial rates are typically higher than the introductory rates on adjustable-rate mortgages. If you plan to sell or refinance within a few years, you may pay more in interest than necessary with a fixed-rate loan.
A 30-year fixed mortgage at 6.5% on a $400,000 loan results in total interest of approximately $510,000 over the life of the loan. A 15-year fixed at 5.8% on the same amount totals roughly $170,000 in interest.
Key Tips
Fixed-rate mortgages are ideal when rates are historically low and you plan to stay long-term
Compare 15-year and 30-year options to see if the higher payment is manageable
Even with a 30-year fixed loan, making extra payments can significantly reduce total interest
Understanding Adjustable-Rate Mortgages
An adjustable-rate mortgage features an interest rate that changes periodically based on market conditions. Most ARMs start with an initial fixed-rate period, during which your rate is locked at a lower level than comparable fixed-rate mortgages. After this initial period, the rate adjusts at set intervals, typically once per year, based on a benchmark index plus a margin set by the lender. ARM rates are calculated using the formula: index plus margin equals your interest rate. Common indexes include the Secured Overnight Financing Rate and the one-year Treasury rate. The margin, typically 1.75 to 3.50 percent, is fixed for the life of the loan and represents the lender profit. When the index rises, your rate increases; when it falls, your rate decreases. ARMs include rate caps that limit how much the rate can change. There are three types of caps: the initial adjustment cap limits the first rate change after the fixed period ends, the periodic adjustment cap limits each subsequent annual change, and the lifetime cap limits the total increase over the life of the loan. A typical cap structure is 2/2/5, meaning the rate can increase by up to 2 percent at the first adjustment, 2 percent at each subsequent adjustment, and no more than 5 percent over the starting rate across the entire loan term. Understanding these caps is essential for evaluating your worst-case scenario payment.
ARM rate caps protect you from extreme payment increases. A 5/1 ARM with a 2/2/5 cap structure starting at 5.5% can never exceed 10.5%, regardless of how high market rates go.
Key Tips
Always calculate your maximum possible payment based on the lifetime rate cap
Understand which index your ARM is tied to and how volatile it has been historically
Ask your lender to explain the cap structure in detail before committing
Comparing Total Costs
Comparing the total cost of an ARM versus a fixed-rate mortgage depends heavily on how long you plan to keep the loan and the direction of interest rates. During the initial fixed period of an ARM, you are virtually guaranteed to pay less interest than with a fixed-rate mortgage because ARM introductory rates are typically 0.50 to 1.50 percent lower. For a $400,000 loan, a rate difference of 1 percent translates to approximately $250 per month in savings. Over a 5-year initial period, this amounts to roughly $15,000 in savings. The uncertainty begins when the initial period ends. If interest rates have risen, your ARM rate will increase, potentially exceeding what you would have paid with a fixed-rate mortgage. If rates have stayed flat or declined, you may continue to enjoy lower payments. Historical data shows that ARM borrowers who sell or refinance within the initial fixed period almost always come out ahead financially. The break-even analysis is a useful tool for comparison. Calculate how much you save during the ARM initial period versus how much more you would pay if rates increase to the maximum cap after the initial period. If you plan to own the home for fewer years than the initial fixed period, the ARM is almost certainly the better financial choice. If you plan to own for significantly longer, the fixed-rate mortgage provides certainty that may be worth the higher initial cost.
Key Tips
Calculate the break-even point where ARM savings offset potential future rate increases
Factor in the likelihood of moving or refinancing within the initial fixed period
Remember that you can refinance an ARM into a fixed-rate mortgage later if rates remain favorable
When to Choose Each Option
Choosing between an ARM and a fixed-rate mortgage comes down to your time horizon, risk tolerance, and financial goals. A fixed-rate mortgage is generally the better choice if you plan to live in the home for more than 7 to 10 years, if you prefer payment stability and predictability, if interest rates are currently at historical lows, if your budget is tight and you cannot absorb potential payment increases, or if you are risk-averse by nature. The certainty of knowing your payment will never change provides peace of mind that many homeowners value highly. An ARM may be the better choice if you plan to sell or move within 5 to 7 years, if you expect your income to increase significantly in coming years, if current ARM rates offer substantial savings over fixed rates, if you are financially sophisticated and comfortable managing rate risk, or if you plan to refinance before the initial period ends. Military families, corporate transferees, and young professionals who expect to relocate are common ARM candidates. Your current financial situation also matters. If the lower ARM payment allows you to buy the home you want while the fixed-rate payment would stretch your budget uncomfortably, the ARM may be appropriate as long as you have a plan for the adjustment period. However, never rely on being able to refinance as your sole strategy, since future qualifying may not be guaranteed.
The average American homeowner moves every 8-10 years. If your expected stay is shorter than the ARM initial fixed period, you may never face a rate adjustment.
Key Tips
Be honest about your likely timeline in the home when choosing between ARM and fixed
Do not choose an ARM solely because you cannot afford the fixed-rate payment
Have a contingency plan if you cannot sell or refinance before the ARM adjusts
Hybrid and Special ARM Products
The mortgage market offers several variations of the standard ARM that may suit specific needs. Hybrid ARMs are the most common type, combining an initial fixed-rate period with subsequent adjustable periods. The naming convention describes the structure: a 5/1 ARM has a 5-year fixed period followed by annual adjustments, a 7/1 ARM has a 7-year fixed period, and a 10/1 ARM has a 10-year fixed period. The longer the initial fixed period, the higher the initial rate, but still typically below comparable fixed-rate mortgage rates. A 5/6 ARM adjusts every 6 months after the initial period instead of annually, which can result in a slightly lower rate but more frequent changes. Interest-only ARMs allow you to pay only the interest during the initial fixed period, resulting in even lower payments. However, you are not building any equity during this time, and payments increase significantly when the interest-only period ends and you begin repaying principal. These are best suited for financially sophisticated borrowers with specific strategies. Payment-option ARMs offer multiple payment choices each month, including minimum payment, interest-only, and fully amortizing options. These carry significant risk of negative amortization, where your loan balance actually grows, and are generally not recommended for most borrowers. Convertible ARMs include an option to convert to a fixed-rate mortgage at specified times without a full refinance, though the converted rate may be slightly higher than market rates. This feature provides a built-in exit strategy from the adjustable rate.
Key Tips
Match the ARM initial period to your expected time in the home for maximum benefit
Avoid interest-only and payment-option ARMs unless you have a clear financial strategy
Ask about convertible ARM options that let you switch to fixed without refinancing
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Frequently Asked Questions
Yes, an ARM can be an excellent choice in several situations. If you plan to sell or move before the initial fixed period ends, you benefit from the lower rate without ever facing an adjustment. If you expect income growth or plan to refinance, the initial savings can be substantial. The key is having a realistic timeline and a plan for when the rate adjusts.
The maximum increase depends on your cap structure. With a typical 2/2/5 cap on a 5/1 ARM starting at 5.5%, your rate could increase to 7.5% at the first adjustment, 9.5% at the second, and a lifetime maximum of 10.5%. On a $400,000 loan, this could increase your monthly payment from approximately $2,271 to $3,656 at the lifetime cap.
Yes, refinancing from an ARM to a fixed-rate mortgage is a common strategy. Many borrowers take advantage of the lower ARM rate initially and then refinance to a fixed rate before the adjustment period begins. However, refinancing requires qualifying again and paying closing costs, so factor these into your decision.
The Secured Overnight Financing Rate, or SOFR, has become the most common index for new ARM products after replacing LIBOR. SOFR is based on actual transactions in the US Treasury repurchase market and is considered more transparent and reliable. Some older ARMs may still reference the one-year Treasury rate or other indexes.
The margin on an ARM, which is added to the index to determine your rate, is set by the lender and may be somewhat negotiable, especially for well-qualified borrowers. Shopping multiple lenders is the most effective way to find competitive ARM pricing. The index itself is determined by the market and is not negotiable.
