Fixed-Rate vs. Adjustable-Rate Mortgages: How to Choose

Fixed-rate mortgages are the default choice for good reason: predictability. But adjustable-rate mortgages can save money in specific situations. Here is how to evaluate the trade-off.

Your interest rate and principal-and-interest payment stay the same for the entire loan term (often 15, 20, or 30 years). Your total payment can still change when property taxes or insurance change, but the mortgage portion is locked. This is straightforward, predictable, and low-risk.

An ARM (adjustable-rate mortgage) has a fixed rate for an opening period, then adjusts based on a market index plus a set margin. Most conforming ARMs now use the SOFR index and adjust every six months, so you will see names like 5/6 (fixed 5 years, then adjusting every 6 months), 7/6, and 10/6 instead of the older once-a-year 5/1. The starting rate is often lower than a comparable fixed rate, by an amount that changes with the market. Caps limit each change: a common 5/6 structure allows 2% at the first adjustment, 1% after that, and 5% over the life of the loan; 7/6 and 10/6 ARMs often allow 5% at the first adjustment. Your Loan Estimate shows the caps and the highest possible payment.

You have a firm plan to sell within the fixed period, such as a planned relocation, and you can afford the highest payment the caps allow. You need an exit plan that does not depend on luck: refinancing requires a new approval, and lower rates are never certain. If you might stay beyond the fixed period, a fixed rate is usually safer.

• ✓Fixed rates are predictable — your principal and interest payment never changes
• ✓ARMs often offer lower starting rates but adjust after the fixed period, now usually every six months
• ✓Check the caps and highest possible payment on your Loan Estimate
• ✓Without a clear exit plan, a fixed rate is the safer choice