Fixed vs Variable Rate Mortgage
The choice between a fixed-rate and variable-rate mortgage affects your payments, risk, and total loan cost. Fixed rates provide stability while variable rates can start lower but fluctuate.
Fixed-Rate Mortgage
A fixed-rate mortgage locks in your interest rate for the entire loan term. Your monthly payment never changes regardless of market conditions.
- •Rate stays the same for entire loan term
- •Predictable monthly payments
- •Protected from rate increases
- •Typically higher initial rate than variable
Variable-Rate Mortgage (ARM)
A variable-rate (adjustable-rate) mortgage starts with a lower rate that adjusts periodically based on market conditions after an initial fixed period.
- •Lower initial rate (teaser period)
- •Rate adjusts after initial period (3, 5, 7 years)
- •Payments can increase or decrease
- •Rate caps limit maximum increase
Key Differences
| Aspect | Fixed-Rate Mortgage | Variable-Rate Mortgage (ARM) |
|---|---|---|
| Initial Rate | Higher | Lower (1-2% less) |
| Payment Stability | Never changes | Changes after fixed period |
| Risk Level | Low (predictable) | Higher (rate can increase) |
| Best When Rates Are | Low (lock them in) | High (expect them to drop) |
| Typical Terms | 15, 20, or 30 years | 5/1, 7/1, 10/1 ARM |
When to Use Each
Choose fixed-rate if you plan to stay in the home long-term and want payment certainty. Choose variable-rate if you plan to move or refinance within the initial fixed period, or if current fixed rates are unusually high.
Frequently Asked Questions
What does 5/1 ARM mean?
A 5/1 ARM has a fixed rate for the first 5 years, then adjusts once per year after that. The "5" is the fixed period and "1" is how often it adjusts.
How much can a variable rate increase?
ARMs have rate caps. A typical cap structure is 2/2/5: max 2% increase at first adjustment, max 2% each subsequent adjustment, and max 5% total increase over the life of the loan.