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Fixed- Vs. Adjustable-Rate Mortgage: What’s The Difference?

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Published on March 18, 2022
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Buying a home is one of the biggest purchases you’ll ever make. With such a large amount of money on the line, it is critical to understand the different types of mortgages so that you can pick the right option for your finances.

We’ll take a closer look at the differences between a fixed- vs. adjustable-rate mortgage. Then you can decide which one is best for you.

Fixed-Rate Mortgage And Adjustable-Rate Mortgage: A Brief Overview

As with all loan products, a fixed-rate mortgage and an adjustable-rate mortgage both offer an opportunity to make your dream of homeownership a reality. But the right mortgage is different for everyone.

Here’s what to know about a fixed vs adjustable-rate mortgage.

Fixed-Rate Mortgage 

A fixed-rate mortgage is exactly as it sounds –  the interest rate on your home loan is fixed for a certain period of time. Maybe it’s 10, 15 or 30 years – but for the entire length of that mortgage, that interest rate won’t change.

With this fixed-rate period, your monthly payment of principal and interest won’t change. However, your overall mortgage payment could change due to the fluctuations in your homeowner's insurance bill and property tax costs.

This appeals to a lot of people because it gives them certainty. Even though your mortgage payment can vary a bit, a fixed-rate loan keeps the payment relatively steady.

Adjustable-Rate Mortgage  

An adjustable-rate mortgage, otherwise known as an ARM or variable-rate mortgage, has two components. The first is the fixed component, meaning that the interest rate stays level for a fixed-rate period. This can be as short as 6 months or as long as 10 years. However, they all begin to adjust after that fixed period. They adjust up and down with the market.

At Quicken Loans®, whether you choose the 5-, 7- or 10-year ARM, you’ll get the lowest rate we offer and save thousands over a traditional fixed-rate mortgage during the initial fixed-rate period. But after that initial interest rate period, the rate may change according to the terms and your documentation. This may be in intervals of 6 months or a year, depending on the loan.

What Is The Difference Between A Fixed- And An Adjustable-Rate Mortgage?

The biggest difference between a fixed- and an adjustable-rate mortgage is the interest rate details.

When you choose a fixed rate, that will lock in the given interest rate for the life of your loan. But when you choose an adjustable-rate mortgage, the interest rate will change multiple times. With these interest rate changes, the monthly payment for your ARM could vary significantly.

ARM Vs. Fixed: Additional Differences

The fact that your mortgage lender can or cannot change your interest rate is a big difference. But here are a few other differences to consider:

  • Margins: ARM borrowers must agree to pay a rate that stays above a specified low point. With that, you’ll know that your interest rate will never fall below a certain margin outlined in your mortgage paperwork.
  • Cap limits: Cap limits will come into play at each interest rate interval. The cap limit indicates how much a lender can increase or decrease the interest rate on each adjustment over the life of the loan.
  • Interest rates: At first, ARM rates are typically lower than fixed-rate mortgages. That’s because the lender can modify the rate to match the market at regular intervals after the introductory period.

What Are The Similarities Between Fixed- And Adjustable-Rate Mortgages?

Although there are plenty of differences when it comes to an ARM vs. fixed mortgage, there are some similarities to keep in mind.

  • Term length: ARMs and fixed-rate mortgages both offer similar loan terms. You’ll find a 30-year option with both.
  • Credit score: Whether you pursue a fixed- vs. adjustable-rate mortgage, the lender will look at your credit score as a part of the qualification process. Those with a high credit score are more likely to qualify for either type of loan and get more favorable rates.

When To Use An ARM Vs. A Fixed-Rate Mortgage

When deciding which mortgage loan is best for you, there are lots of factors at play. If you are weighing the choices, here are some situations to take into consideration.

Choosing An Adjustable-Rate Mortgage

An adjustable-rate mortgage isn’t right for everyone, but it could be the best choice for you. Here are a few reasons when an ARM might work out well for you:

  • Planning to move soon: Are you planning to move on from this home in just a few years? An ARM can allow you to take advantage of the best interest rate while you remain in the home.
  • Higher mortgage rates: If you are buying a home in a high interest rate market, then an ARM could help you tap into lower interest rates in the future.
  • Flexibility: If you are planning on paying down a big chunk of your mortgage upfront, then enjoying the lower interest rate while you tackle the principal could be a smart move. Plus, if rates are high when you buy, it’s possible that interest rates will go down and leave more room in your budget.

Choosing A Fixed-Rate Mortgage

A fixed-rate mortgage is a popular option. Here’s when it makes sense to go with a fixed-rate mortgage.

  • Planning to stay in their home for a long time: Are you planning on living in this home for the long term? If so, locking in a predictable interest rate can help your budget stay stable for years to come.
  • Low mortgage rates: If you are buying a home in a low interest rate environment, then locking in a low fixed rate is a smart move. You’ll avoid higher rates when the market rate rises.
  • Less risk: A fixed interest rate is easier to budget for. And with that, there is less risk involved on the off chance that market rates go through the roof and lead to an unaffordable mortgage payment.

The Bottom Line

Both adjustable- and fixed-rate mortgages offer advantages to borrowers. The right option depends on your financial situation and intentions for the home you are purchasing. Since it will impact your finances for years to come, this is not a decision to take lightly. Take some time to learn more about mortgages and how mortgage rates are determined before moving forward with either type of mortgage.    

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.