Fixed Rate vs. Adjustable Rate Mortgage: How To Choose

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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If you’re buying a home soon, you’ll need to consider mortgage loans before you start shopping. There are two options to choose from fixed and adjustable-rate mortgages. In this guide, you’ll discover the benefits and drawbacks of each and how to decide which is best for you. 

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What is a Fixed Rate Mortgage?

As the name suggests, fixed-rate mortgages have the same interest rates for the life of the loan. This means your principal and interest payments won’t change. As a result, homeowners most commonly use this type of mortgage loan since it offers a predictable monthly payment that’s easier to work into your monthly spending plan. 

Pros of Fixed Rate Mortgage Loans

  • Consistent monthly payment for principal and interest
  • Available for a 30- or 15-year term

Cons of Fixed Rate Mortgage Loans

  • Borrowers must refinance to secure a lower rate if market conditions change 
  • You’ll pay closing costs each time you refinance your mortgage

What is an Adjustable Rate Mortgage?

Adjustable-rate mortgages (ARMs) come with fluctuating interest rates. In most cases, you’ll start off with a lower interest rate than a fixed-rate mortgage, but only for a set period, known as the introductory period. Once this window ends, you’ll get an interest rate that adjusts with market conditions or based on the index it’s connected to.

How ARMs Work

To illustrate how ARMs work, assume you get a 7/1 ARM. The introductory period will remain intact for seven years and could change annually after this time for the duration of the loan term. Below are some terms commonly used by lenders when discussing ARMs: 

  • Adjustment Frequency: the frequency by which the interest rate can change on an ARM, which can be monthly, quarterly or annually. Some ARMs adjust every three or five years. 
  • Margin: this percentage helps determine your interest rate. So, if your margin is 3% and the index rate is 0.25%, your interest rate is 3.25%. 
  • Interest Rate Cap: the amount by which your interest rate can increase during each adjustment period and over the loan term. 
  • Payment Caps: limits the total amount you can owe on your mortgage, which is typically 125% of the original loan amount
Choose A Mortgage That's Right For You
Lower Rate, Fast Approval. Connect with a Lending Expert. Apply Now. No Hidden Fees. Faster Closing Times. Low Fixed Rates. A+ Rating with BBB. Cash-Out Refinancing.

Pros of Adjustable Rate Mortgage Loans

  • More affordable during the introductory period
  • Refinancing is not required to secure lower interest rates if market conditions change
  • It could be more cost-efficient for homeowners who only plan to stay in the home for a short period

Cons of Adjustable Rate Mortgage Loans

  • Monthly mortgage payments (principal and interest) could be costly once the introductory interest period ends
  • Homeowners who stay in the home for several years could spend a mini-fortune on interest

ARM vs. Fixed Rate: How to Choose

Here are some important considerations when deciding whether an ARM or fixed-rate mortgage is ideal for your situation. 

Current Interest Rate Environment

What’s the average interest rate on mortgage products? Is it trending upward or downward? 

How Long Do You Plan on Keeping the Home? 

Do you plan to sell your home in a few years or stay put for some time? 

How Frequently Will the ARM Adjust?

Will the interest rate on the ARM you’re considering change frequently? If so, how often? 

ARM Payment Affordability at Higher Rates

Can you afford fluctuations in the monthly mortgage payment as the interest rate changes? 

When To Choose a Fixed Rate Mortgage

A fixed-rate mortgage could be sensible if: 

  • You plan to live in the home for a long time and prefer consistent mortgage payments. 
  • You don’t want a mortgage with an interest rate that can change over time. 
  • The average mortgage interest rates are low as a result of market conditions.

When To Choose an Adjustable Rate Mortgage

In some instances, it could be more logical to take out an adjustable-rate mortgage: 

  • You’re only planning to stay in the home for a few years and want to take advantage of a lower interest rate and more affordable mortgage payments. 
  • Due to market conditions, the average interest rates on mortgage products are on the higher end. 
  • If interest rates increase, you have wiggle room in your budget to afford higher monthly payments.

Where You Can Get a Mortgage Loan

When you’re ready to start shopping for a mortgage, consider a home loan through loanDepot. This direct lender is licensed in all 50 states and has originated over $100 billion in mortgages to date. loanDepot, the fifth-largest mortgage lender in the nation, also has knowledgeable and friendly Licensed Loan Officers to help you decide what’s best for you. 

There are home loan options available, including fixed-rate and adjustable-rate mortgages, and it’s easy to get started. Simply complete a quick questionnaire to connect with a loan officer in your area or visit a branch in your local area.

Choose A Mortgage That's Right For You
Lower Rate, Fast Approval. Connect with a Lending Expert. Apply Now. No Hidden Fees. Faster Closing Times. Low Fixed Rates. A+ Rating with BBB. Cash-Out Refinancing.

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