Fixed vs. adjustable-rate mortgage: Stability or savings?

What you’ll learn ✅

— What fixed and adjustable-rate mortgages are

— What differs between these loans

— When to choose one option over the other

Finding the perfect house is the most important part of the homebuying process. But choosing the right loan is a close second. 

Unless you can make an all-cash offer or put a substantial amount of money toward the down payment, your mortgage — and your interest rate — will affect your finances for years to come. The type of loan impacts the duration and cost of your mortgage, so one of the first decisions you’ll make is whether to get a fixed versus adjustable-rate mortgage (ARM).

Most buyers want the stability of knowing how much they’ll have to pay every month and opt for a fixed rate mortgage. But an adjustable-rate home loan can offer significant short-term savings. In this article, we’ll dive into the differences, benefits, and drawbacks of both to help you make a confident decision.

What’s a fixed-rate mortgage?

A fixed-rate mortgage is a home loan with an interest rate that stays constant over the entire term — typically 15, 20, or 30 years. Your mortgage payment stays exactly the same, regardless of external market conditions and shifting rates.

Fixed rate mortgages are much more popular than ARMs because they’re predictable, especially during times of economic uncertainty. About 90% of homebuyers opt for a fixed rate mortgage.

What’s an adjustable-rate mortgage?

An ARM, also called a variable-rate mortgage, usually starts with a low, fixed introductory rate, which may last for 2–10 years. Once the introductory period ends, your rate might increase or decrease depending on market conditions. Your lender or servicer adjusts the interest rate periodically based on a financial index like the Secured Overnight Financing Rate or the U.S. Prime Rate.

One key advantage of a variable-rate mortgage versus a fixed rate mortgage is that buyers usually have lower monthly payments during the introductory period. But once the ARM starts fluctuating, the interest rate changes at regular intervals — usually every six months or year. Modern ARMs often feature lifetime, initial, and periodic caps to protect homeowners from extreme payment shocks, but they’re still not as predictable as fixed-rate loans.

What’s the difference between fixed and adjustable mortgage rates?

We’ve covered the basic definitions of each loan type. Now, let’s see their key uses and features side by side. Here’s a quick, practical breakdown of the differences between fixed and variable mortgage rates:

Fixed-rate mortgage benefits

Some of the main advantages of a fixed-rate mortgage include:

— Predictability: Budgeting, saving, and investing can be easier when you always know what your monthly payment will be.

— Long-term stability: Securing a fixed-rate loan shields you from rising interest rates, which can be especially valuable in uncertain economic times.

— Straightforward structure: Understanding fixed-rate loans is typically simpler compared to ARMs — there’s no need to track benchmarks and anticipate future rate adjustments.

Adjustable-rate mortgage benefits

Here are a few advantages of a variable-rate mortgage:

— Lower initial payments: ARMs get you lower introductory rates, which can free up cash for other expenses, like moving fees or closing costs.

— Short-term savings: If you’re planning to move or refinance before the first adjustment, you’ll see savings without dealing with rate changes.

— More purchasing power: Because your monthly payments start lower, you may qualify for a higher loan amount.

Which is better: a fixed-rate mortgage or an adjustable-rate mortgage?

Choosing between a fixed versus adjustable-rate mortgage depends on your lifestyle, risk tolerance, and long-term financial plans. Let’s take a look at a few different scenarios and when each loan might make sense.

When to consider a fixed-rate mortgage

Getting a fixed-rate mortgage is the most popular choice among buyers. Here are some situations when you might consider one:

— You’re buying your forever home: If your goal is long-term homeownership, you might prefer stable payments over time.

— You prioritize other financial needs: The predictability of fixed rates supports long-term money goals. You’ll have more flexibility planning investments, from retirement and college savings to travel and home-improvement projects.

— You prefer low-risk payments: Fixed rates eliminate uncertainty and reduce homeowner stress.

— You value simplicity: Unlike having an ARM, you won’t need to track changing indexes and adapt your budget to rate adjustments.

When to consider ARM

If your home plans are more short-term or you don’t mind the shifts, an ARM could be a good idea. Here are some scenarios when you may pick a variable loan:

— You expect to move or buy another home soon: ARMs are ideal for house flippers and other short-term owners who won’t experience future rate increases.

— You anticipate having a higher income later: Future income growth can make adjustments easier to manage.

— You’re applying for a larger loan: Lower introductory rates can make higher-priced homes more accessible. But this can lead to much larger payments in the future.

— You want lower up-front costs: Early payments are usually more affordable with a variable-rate mortgage. This can be a relief throughout homebuying, which typically has quite a few expenses to manage.

If you aren’t sure which is right for you, check today’s rates with Better’s online platform, and evaluate ARM and fixed-rate options side by side. Pick your mortgage type, like conventional or VA loan, then view term lengths and rates to find the best pick for your situation.

...in as little as 3 minutes – no credit impact

Get Better financing for your next home

There’s no one-size-fits all in home financing. People who want long-term stability and protection from volatile economic conditions may pick a fixed-rate loan. But those who are comfortable with shifting conditions in exchange for short-term perks might prefer ARMs. Your mortgage should suit your financial and lifestyle needs, and Better understands that.

Better’s 100% online platform helps you from start to finish. Apply for pre-approval, compare loans side by side, and lock in a competitive rate, whether you want fixed rate or ARM. Our dashboard makes it easy to track your progress and ask quick questions to our team of experts, leading to a comfortable and fast close.

Secure a loan that fits you, and move forward confidently with Better.

...in as little as 3 minutes – no credit impact

FAQ

Is it easier to qualify for a fixed-rate mortgage vs. an adjustable-rate mortgage?

Neither option is necessarily easier, as qualification depends on your lender and financial profile. However, ARMs usually come with lower introductory rates, which can improve your debt-to-income ratio and help you qualify for a higher loan amount.

Why are ARM rates higher than fixed right now?

ARM rates may be higher when lenders anticipate more rate volatility in the near or distant future. Economic uncertainty can shift rates substantially, causing lenders to increase their margins and index-based adjustments.

Can I refinance an ARM into a fixed rate later?

Yes, you can refinance out of an ARM and lock in predictable payments down the line. In fact, a lot of homeowners take this route, especially if rates drop. 

What’s the difference between a 30-year fixed vs. 5/1 ARM?

A 30-year fixed mortgage locks you in at the same rate for the entire 30-year loan term. A 5/1 ARM offers a fixed interest rate for the first five years. Then, the rate adjusts up or down annually based on a financial index plus a lender margin.