Mortgages & Creative Financing

Fixed-Rate vs. Adjustable Rate Mortgages: What’s the Difference?

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At some point in their lives, most people will find themselves in some sort of debt. Mortgages, which are used to pay for homes, represent the largest sources of debt most people will ever take on.

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Needless to say, a mortgage on a home will cost you quite a bit over time. Mortgages can be quite expensive after repaying the actual cost of the home with additional interest.

It’s only natural that people would be looking for ways to cut down the costs associated with buying a home. One of the easiest places to save money on a mortgage is on the interest rate, which can mean a difference of thousands of dollars over the life of the loan. There are two types of mortgage rates available: fixed and adjustable rate mortgages (or ARM). It pays to know the difference between the two.

What Is the Difference Between Fixed-Rate Mortgages and ARMs?


A fixed-rate mortgage is a home loan with a locked-in interest rate throughout repayment. This rate is "fixed" after you are approved for a mortgage. Afterwards, it will never change.

The interest rate on your loan is determined by how the market is currently performing at the time you take the loan, and the rate stays the same throughout market fluctuations. The constant interest rate offers more certainty when determining how much interest is owed each month on top of the regular principal.

Comparatively, an adjustable rate mortgage doesn’t stay fixed throughout the repayment term; in fact, it will fluctuate over time with the market rate. There are several ARM options including 3/1, 5/1, 7/1, and 10/1.

Here are a couple examples of how they work. A 3/1 ARM offers a fixed interest rate for the first three years of repayment; afterwards, the rate is adjusted every year. Similarly, your interest rate will be locked in for the first 10 years of a 10/1 ARM and adjusted annually afterwards.

Related: Should Real Estate Investors Sleep Soundly Despite Stock Market Scaries?

As you can see, there are some differences between fixed-rate mortgages and ARMs. Fixed-rate mortgages keep the same interest rate throughout. Adjustable rate mortgages are hybrid interest rates with an initially fixed rate and variable rate following the initial fixed period.

Basic Considerations Behind Fixed & Adjustable Rate Mortgages

Fixed-Rate Mortgages Offer More Certainty

If you’re looking for an easier way to budget for a home, fixed-rate mortgages might be for you. Because their rate is constant, you always know how much you’ll have to pay in interest. They’re easy to understand, but they come with a potential drawback.

If the market trends low, you could be stuck paying a higher rate compared to the market for the full life of your loan. On the other hand, if the market is high, you could save money because the rate will not rise.

ARMs Are Impacted by Market Trends

ARMs can be tricky. Due to fluctuating rates, repayment expectations are not as clear cut. Predicting future payments can be challenging, but there’s a chance they might decrease if the market stays low.

That being said, the same thing can happen in reverse; you might end up paying more than your introductory rate (and more than you would on a fixed-rate loan) if things go poorly. In order to entice people to take this risk, many ARMs offer lower-than-average rates during the introductory period.

Which Type Should You Choose?


If you are averse to risk and uncertainty, a fixed-rate mortgage is likely the better option. If you can get a 10/1 adjustable rate mortgage and are confident enough to take on some level of risk, you may strike a great deal on your home loan.

The challenge with adjustable rate mortgages is that trying to predict the market is futile; if it could be done, anyone could become a stock millionaire.

Related: 3 Ways to Eliminate Mortgage Debt

The best anyone can do when considering an ARM is to analyze market trends and consider whether they could continue to make home payments if their rate should rise and increase the monthly cost of their mortgage. They may be able to find a great deal that way.

Overall, fixed-rate mortgages are generally considered a wise financial move for their security and simplicity, which becomes more important given the size of mortgage debt. While ARMs are riskier, they can also be rewarding. Ultimately, it comes down to figuring out your own personal preference.

Which type of mortgage do you have on your home and was it the “right” choice?

Share your thoughts with a comment!

Andrew is a content associate for LendEDU—a website that helps consumers, small business owners, real estate owners, and more with their finances. When he’s not w...
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    Seth Levey Rental Property Investor from Westminster, CO
    Replied about 1 year ago
    Nice article. Do you consider the investor strategy different than for the homeowner as it pertains to these loans? In other words, if you plan to live there for the next 40 years, an ARM loan has lots of risk. For an investment, you might consider the 5 or 7 year ARM to maximize returns and when rates adjust, rents will (probably) be higher to compensate for the difference if rates increase. Or, if rates are not favorable when it comes time to adjust, you could more easily sell the property and move on to the next investment.
    Rich Lopes Rental Property Investor from San Jose, CA
    Replied about 1 year ago
    Generally 7/1 or 10/1 ARM is great if you want to save and get maximum Tax deductions on your income. That being said I think ARM is good when the rates are high like '06 & '07, but not so good in today's market. With today's low interest rate it's hard to resits the 30 year fixed mortgage.
    Lee Wenger Investor from Englewood, Colorado
    Replied about 1 year ago
    Not sure I can agree with you on this... The delta between fixed and adjustable mortgates stay relatively constant. Saving 1/2 point at 7 points gives you about a 7% advantage by going with an adjustable rate. At 4% that same 1/2 point gives you a 12.5% advantage so the adjustable rate can provide even higher advantage at lower rates than at higher rates. The real difference ,of course, is what you do with the additional funds/savings. If you have the discipline to apply those savings back to the principal it really is hard to beat the ARM even moreso at lower rates.
    Lee Wenger Investor from Englewood, Colorado
    Replied about 1 year ago
    The best advice I ever got along these lines was to do the following: Calculate the monthly payment of a 30year fixed. Bun instead get a 7/1 Arm BUT each month make the payment that you would have if you had gotten the 30 year fixed instead of the lower ARM payment. So use the gap in rates to pay yourself instead of the bank. If, at the the end of 7 years the rates have gone up, you can refi the balloon amount into a 15 year fixed and unless we're looking at another carter era rate insanity, which is extremely unlikely for a number of reasons, you will pay of the mortgage in 23 years and will never pay more than you would have if you just took the 30 year fixed up front. It's my opinion that there's almost never a good reason to do a 30 year fixed unless you like giving your money to the bank instead of to yourself.
    Pradeepan Venukanthan from San Jose, CA
    Replied about 1 year ago
    In my opinion for hot states like California where the property prices are no affordable ARM kind of makes it affordable. I am blessed to have a lender who does rate relock whenever there is an adjustment for a minor cost( which gets recovered in a month or two) rather than doing a refinance which costs a bomb typically. I am currently in 5/1 ARM and saving atleast $300-$400 a month. I also guess it depends on the difference in the rates between ARM vs fixed similar to 30 yr vs 15 yr mortgage arguments. I also would suggest take the difference in the payments and apply it towards the principal that way your principal comes down significantly or use it towards investments. It require discipline though :) I also think the age also plays a major role in deciding fixed vs ARM where you dont want to take too many risks atleast know what you are getting into.
    Byron Hunter Real Estate Agent from Dallas, TX
    Replied about 1 year ago
    Something interesting I never considered was the impact of the lower adjustable rate on the first few years of the loan. The first years are most expensive because the higher principal has not been paid down yet. Getting the lower fixed "intro rate" compounded for 10 years (10/1 ARM) could have a huge impact. Then, if your adjusted rate goes up, it will be on the lower principal balance. Question, does anyone know if ARMs typically have a refinance restriction clause? Say you refinance after the 10 year intro period into a fixed rate?
    Austin Spitzenberger
    Replied 5 days ago
    Byron, Did you ever find out an answer on this? This was my thought process as well.
    John Mahady Investor from DuPage, IL
    Replied 7 months ago
    I don't believe in paying more into a 30 year fixed than the monthly bill. That extra your pay pays down principle but so what. Its unavailable for the remainder of the loan. You see it at the end in depreciated dollars; the future value of dollars versus the present value. With my multiple properties I borrow all over the yield curve. 30, 10/1, 5/1, helocs. With that extra money from the lower rate on the ARM i pay down the heloc since next month the interest is calculated on the net balance. With 30 years the banks front load interest versus principle paydown. Thats why they like people to refinance so they pay more interest in their monthly mortgage bill. I used my helocs aggressively. Pay it down then take the available balance to pay off my other mortgages and then get a heloc on the payoff property to get bakc 75% of my cash to pay off the more expensive heloc or mortgage. I list all my debts based on interst rate and attack the highest interst costs to reduce my overall average cost of funds. rinse and recycle unril all paid off. 30 year mortgage look good for cash flow but if you want to pay off debt aggressively so you can reinvestment to leverage upi recommend using helocs and paying off mortgages especially if you have low LTV debt. Low LTV means you have money locked up for 30 years that you could investment NOW when the time or property is right.