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Adjustable vs Fixed-Rate: Which Is Best for You?

September 29, 2025 Blog, Homebuying, Featured

Unlike a quality baseball cap, mortgages are not “one size fits all". Lenders offer a variety of loan products, complete with seemingly complicated terminology and financial mechanisms. Lucky for you, there’s a way to find out what kind of mortgage is best for you. Let’s talk about two basic mortgage categories: adjustable-rate and fixed-rate. Understanding the difference can help you make more informed financial decisions when buying a home.

Adjustable-Rate Mortgage

With an adjustable-rate mortgage (or "ARM"), the interest rate can change over the life of the loan, typically after an initial fixed-rate period. This differs from a fixed-rate mortgage, where the rate remains the same. ARMs usually have a lower initial interest rate, resulting in lower initial monthly payments of principal and interest. However, the rate and payments will increase or decrease depending on market interest rates after the fixed-rate period.  There are a few terms you should know when looking into an ARM:

Initial rate 

As the name implies, this refers to the first interest rate the lender gives you when you take out an ARM loan. Initial rates for ARMs are often relatively low, which appeals to many homebuyers. However, if market rates go up after the initial period, you could end up with a higher interest rate than you would have with a fixed-rate mortgage.

Index and Magin

After the initial period, your interest rate will adjust based on a benchmark index (like the Secured Overnight Financing Rate or Treasury bills) plus a fixed margin. Your lender will disclose the index and margin at time of loan application. 

Intertest Rates Change Frequently 

ARM loans have an initial fixed-rate period, after which they will be subject to change at predetermined intervals. This information is generally given in a two-number format, like 7/6. The first number is the initial fixed rate period, and the second number is the frequency of adjustments after that point. So, in this example, the initial interest rate would remain fixed for seven years, and then, beginning in year eight, the lender would then reset the rate every six months after that, depending on index fluctuations. Some lenders use a different format, so make sure you clarify the adjustment period with your loan officer.

Rate Caps

Most ARM loans have rate caps that limit how much your interest rate can increase or decrease at each adjustment period and over the life of your loan. The interest rate cap structure offers some protection against significant interest rate swings.

Benefits and risks

Lower initial interest rates—and by extension, lower initial monthly payments—often entice homebuyers to use an ARM loan. However, the lower initial rates and payments won’t last forever. Once it ends, your interest rate and monthly payment will adjust periodically, which may result in unpredictable monthly mortgage payments that are harder to factor into your budget. That said, if the rates based on your ARM index stay low, you stand to save more money over time than you would with a fixed-rate mortgage.

Fixed-Rate Mortgage

With a fixed-rate mortgage, the interest rate given to you by the lender remains the same for the life of the loan. In addition, you benefit from the stability of a monthly principal and interest payment that does not fluctuate as it would with an ARM. However, due to its predictability, the interest rate for a fixed-rate mortgage will generally be higher than the initial interest rate on an ARM.

Which One Is for You?

That depends. If you prefer a more stable and budget-friendly loan, then a fixed-rate mortgage is likely the best option for you. Your interest rate and monthly principal and interest payment will not change. If you can afford to assume more risk, an ARM loan could pay off. Check the rate caps, and if you can still afford the monthly payments at the highest rates, then an ARM may help you save money in the long run. By doing a little homework, you can choose the mortgage that’s right for you.  

Still have some questions, connect with your local Loan Officer

Sources: www.investopedia.comwww.bankrate.com, www.hud.gov

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