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

When it comes to choosing a mortgage, one of the biggest decisions you’ll make is whether to go with a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Both options have their own set of benefits and drawbacks, and the right choice depends on your financial goals, lifestyle, and how long you plan to stay in your home.

Let’s break down the key differences, similarities, and which option might be better for you.

Overview: ARM Vs. Fixed-Rate Mortgages

At their core, fixed- and adjustable-rate mortgages are about how your interest rate behaves over the life of the loan.

• A fixed-rate mortgage locks in your interest rate for the entire loan term, providing predictable monthly payments.
• An adjustable-rate mortgage (ARM) starts with a fixed rate for a set period, then adjusts periodically based on market conditions.

Each has its unique advantages and challenges. Let’s dive deeper into the details.

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) offers a lower introductory interest rate, typically for the first 5, 7, or 10 years. After this initial period, the rate adjusts annually based on an index (like the LIBOR or SOFR) plus a margin set by your lender.

• Pros: Lower initial interest rates, potentially saving you money in the short term.
• Cons: Rates and payments can increase significantly after the fixed period ends.

Read More: What Is An Adjustable-Rate Mortgage (ARM) Loan

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage offers stability by locking in your interest rate for the entire loan term—usually 15, 20, or 30 years.

• Pros: Predictable monthly payments make budgeting easier.
• Cons: Higher initial rates compared to ARMs.

What Are the Differences Between Fixed- and Adjustable-Rate Mortgages?

Margins and Rate Caps

• ARMs: Lenders set a margin that determines how much your rate can adjust. Rate caps limit how much the interest rate can increase per adjustment period and over the life of the loan.
• Fixed-Rate Mortgages: No margins or rate caps apply since the rate remains constant.

Interest Rates

• ARMs: Start with lower rates, which can rise or fall later.
• Fixed-Rate Mortgages: Have higher initial rates but remain stable.

Ease of Qualification

• ARMs: May have slightly easier qualification standards due to lower initial rates.
• Fixed-Rate Mortgages: Require consistent income and a strong credit profile but offer stability.

Read More: Fixed-Rate Mortgages: How It Works, Types, and Their Benefits

How Are ARM and Fixed-Rate Mortgages Similar?

Term Length

Both ARMs and fixed-rate mortgages can be structured as 15-year, 20-year, or 30-year loans, giving you flexibility in repayment timelines.

Credit Qualifications

Lenders typically require a good credit score, stable income, and a reasonable debt-to-income (DTI) ratio for both loan types.

Which Is Better: A Fixed- Or Adjustable-Rate Mortgage?

There’s no one-size-fits-all answer—it depends on your unique situation.

Adjustable-Rate Mortgages May Be Good For:

• Borrowers planning to sell or refinance before the fixed period ends.
• Those comfortable with the risk of rising rates after the adjustment period.
• Buyers who need a lower initial rate to afford their dream home.

Fixed-Rate Mortgages May Be Good For:

• Buyers planning to stay in their home for a long time.
• Those who prefer stability and predictability in their monthly payments.
• Borrowers who expect interest rates to rise in the future.

The Bottom Line

Choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) comes down to your financial goals and how long you plan to stay in your home. Fixed-rate loans provide peace of mind with stable payments, while ARMs offer flexibility and savings in the short term.

Consulting Equity Capital Home Loans with a mortgage professional can help you determine which option aligns best with your needs. Whether you’re purchasing your first home or refinancing, understanding these options is the key to making an informed decision.

FAQs

1. What are the differences between fixed- and adjustable-rate mortgages?‍

Fixed-rate mortgages have a stable interest rate, while ARMs start with a fixed rate that adjusts periodically after the introductory period.

2. How are ARM and fixed-rate mortgages similar?‍

Both require good credit and income to qualify and can be structured with various loan terms, such as 15 or 30 years.

3. Why would you choose an adjustable-rate over a fixed-rate mortgage?‍

You might choose an ARM for its lower initial interest rate, especially if you plan to sell or refinance before the fixed period ends.

4. Is a fixed-rate mortgage or adjustable-rate mortgage riskier?‍

ARMs carry more risk due to potential rate increases, while fixed-rate mortgages are more stable.

5. Is an ARM or fixed-rate mortgage easier to qualify for?‍

ARMs may have slightly easier qualification standards due to lower initial rates, but both require a solid financial profile.

Need help deciding between a fixed-rate and adjustable-rate mortgage? Contact us today for personalized guidance!