Exploring Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

When it comes to financing a home, choosing the right type of mortgage is one of the most important decisions you’ll make. Two of the most common options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Each has its own benefits and is suited for different financial situations. Let’s explore the key differences between these mortgage types and when each might make sense for your home-buying journey.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage offers an interest rate that remains constant throughout the life of the loan, providing predictable monthly payments.

Key Features:

  • Stable Payments: Your principal and interest payments remain the same for the entire term of the loan (usually 15, 20, or 30 years).
  • Long-Term Consistency: A fixed-rate mortgage offers financial stability, making it easier to budget over time.
  • Higher Initial Rates: Fixed-rate loans may have slightly higher starting interest rates compared to ARMs, but they protect you from future rate increases.

Best for:

  • Buyers who plan to stay in their home for a long time.
  • Those who prefer the certainty of consistent payments.
  • Buyers in a market where interest rates are rising or expected to rise.

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage begins with a fixed interest rate for a set period (usually 3, 5, 7, or 10 years), after which the rate adjusts periodically based on market conditions.

Key Features:

  • Lower Initial Rates: ARMs often start with a lower interest rate compared to fixed-rate mortgages, which can save you money in the short term.
  • Periodic Adjustments: After the initial fixed period, the interest rate adjusts annually or semi-annually based on a financial index, such as the LIBOR or SOFR.
  • Rate Caps: Most ARMs include rate caps, which limit how much your interest rate can increase during each adjustment period and over the life of the loan.

Best for:

  • Buyers who plan to sell or refinance before the adjustable period begins.
  • Those purchasing a home in a low-interest-rate market.
  • Buyers looking to save on initial monthly payments.

Key Differences: Fixed-Rate vs. Adjustable-Rate Mortgages

FeatureFixed-Rate MortgageAdjustable-Rate Mortgage (ARM)
Interest RateStays the sameAdjusts after fixed period
Initial PaymentsHigherLower
Long-Term PredictabilityHighVariable
Best forLong-term stability seekersShort-term or flexible buyers

When Does a Fixed-Rate Mortgage Make Sense?

A fixed-rate mortgage is often the best choice when you’re looking for stability and long-term planning. It’s a good fit if:

  • You plan to stay in your home for more than 7-10 years.
  • You prefer consistent payments without worrying about interest rate fluctuations.
  • The current market has relatively low interest rates, making locking in a rate advantageous.

For example, if you’re buying your forever home or expect your budget to remain steady over time, a fixed-rate mortgage can give you peace of mind.

When Does an Adjustable-Rate Mortgage Make Sense?

An ARM may be a smart choice if you value short-term savings and are comfortable with some level of risk. Consider an ARM if:

  • You plan to sell or refinance within the fixed-rate period.
  • You’re buying a home in a market with high initial rates but expect them to drop in the future.
  • You want lower initial monthly payments to free up cash for other financial goals.

For instance, if you’re purchasing a starter home and plan to move within 5-7 years, an ARM could save you money during the time you own the property.

Making the Right Choice for You

Deciding between a fixed-rate mortgage and an ARM depends on your financial goals, lifestyle, and risk tolerance. Here are a few questions to consider:

  • How long do you plan to stay in the home?
  • Are you comfortable with the possibility of your payments increasing in the future?
  • Is saving money upfront more important than long-term predictability?

Both options have their advantages, and working with a trusted lender can help you evaluate which one aligns best with your needs.

We’re Here to Help

Navigating mortgage options doesn’t have to be overwhelming. At Mortgage Investors Group (MIG), our experienced Loan Officers can guide you through the pros and cons of fixed-rate and adjustable-rate mortgages, helping you make an informed decision that fits your unique situation. Whether you’re buying your first home or considering a move, we’re here to support you every step of the way.

Contact MIG today to explore your options and take the first step toward homeownership!