Fixed & Adjustable Rate Mortgages (ARMs)

The difference between fixed and adjustable rate mortgages is that with a fixed rate mortgage you pay the same interest rate over the life of your mortgage, and your payment stays the same. Whereas with an ARM, your interest rate and payment can go up or down as interest rates change. But ARMs aren't quite so simple, as there are different types of AMRs with conditions you should be aware of.

Types of ARMs

The primary difference between various adjustable rate mortgages is the time period at which they're fixed. Most ARMs begin with a period of fixed interest, and that period can vary substantially. With a 10/1 ARM for example the interest rate is fixed for the first 10 years, and then the rate changes each year as interest rates change. But with a 5/1 ARM you have a fixed rate for 5 years. Some ARMs have interest rate caps, so that if interest rates go up beyond a certain amount you'll be protected from excessive increases in your monthly payment. You can calculate potential ARM monthly payments with our free ARM Calculator, and compare ARMs to fixed mortgages with our ARM vs Fixed Rate Mortgage Calculator.

Which Is Better?

Neither mortgage type is better for everyone, but one may indeed be better for you. If interest rates are highly likely to go down over time, you'll probably end up paying less with an adjustable rate mortgage, especially considering they normally start out with rates lower than fixed mortgages. But if interest rates are likely to go up, you might be better off with a fixed rate mortgage. This partially depends on how long you're planning to stay in your house. If you're only planning on living in a house for a few years, the lower initial rate ARMs offer may work out to be better. But if rates are at historical rock bottoms and you're planning on staying in your house for the duration of your mortgage, you'd probably be safer with a fixed rate mortgage, as interest rates can really only go up in such a situation.

Fixed rate mortgages offer stability. You know exactly how much you're going to pay every month. While ARMs might end up cheaper, they might end up more expensive. ARMs carry more risk. If you know you can make your fixed monthly mortgage payment, and you're risk averse, a fixed rate mortgage is likely better for you. If you have plenty of margin and you're willing to take the risk, or you're planning on staying in your house for less than the duration that an ARM is fixed, then an ARM may be right for you.