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Thinking about getting home financing can leave you with more questions than answers. Some of those questions are undoubtedly about whether a fixed-rate or adjustable-rate mortgage is better. Maybe you’re thinking of buying, or maybe you’re just considering a refinancing opportunity. Either way, the interest structure you choose will have a massive impact on what you’ll pay, and when.

That’s why in this post, we’re going to look at just what exactly a fixed-rate mortgage and an adjustable-rate mortgage are. We’ll get into how each one works as well as their pros and cons, so that you’ve got all the information about their key differences. In the end, you’ll be in a better position to determine which loan type fits your needs. 

What’s a Fixed-Rate Mortgage?

A fixed-rate mortgage is the simplest and most predictable type of loan. It’s also the most common for homeowners. The interest rate that you discuss and agree to at closing stays the same for the entire life of the loan. The rate doesn’t change, so your payments also stay consistent. As a result, your loan principal and interest are much easier to track.

Fixed-rate mortgages typically come in terms of 15, 20, or 30 years. The longer the term, the lower the monthly payment, but the more you’ll pay in interest fees over the life of the loan. Fixed-rate loans are perfect if you plan to stay in your home for a long time or prefer predictable payments, no matter what the current interest rates are.

Pros & Cons of Fixed-Rate Mortgages

Pros

  • Predictable monthly payments: Your interest rate never changes, so you’ll know exactly what your payment will be each month.
  • Protection from rising rates: If market interest rates increase, your mortgage stays the same.
  • Long-term financial stability: Homeowners who plan to stay in their property for many years benefit from steady costs and clear long-term planning.
  • Simpler loan management: Fixed-rate loans are easy to understand, with fewer moving parts and less need to watch the market.

Cons

  • Less flexibility if rates drop: If market rates fall significantly, you’ll need to refinance to take advantage of lower payments.
  • Potentially higher lifetime interest: Because the rate doesn’t change, you might pay more in total interest than someone who takes advantage of lower adjustable rates early on.
  • More limiting to short-term affordability: For buyers planning to move or refinance within a few years, the fixed rate may not deliver the best short-term savings.

What’s an Adjustable-Rate Mortgage?

An adjustable-rate mortgage, sometimes called an ARM, starts with a lower interest rate than your typical fixed-rate loan. The catch is that this introductory rate is only available for a set period, after which it can be adjusted at various intervals. Depending on the market trends and current interest rates, your monthly payment could fluctuate wildly after the initial rate expires. 

That said, most ARMs feature rate caps that limit how much the interest rate can change in a single adjustment period. Initial interest periods vary between 3 and 10 years, with 5 years being relatively common. This might be a good loan structure for someone who plans to rehab and resell a property over a few years.  

Pros & Cons of Adjustable-Rate Mortgage

Pros

  • Lower initial rate: ARMs typically start with a lower interest rate than fixed-rate loans, which can make homeownership more affordable, at first.
  • Chance to benefit from falling rates: If market interest rates decline, your adjustable loan may reset to a lower rate, reducing monthly payments without refinancing.
  • Useful for short-term homeowners: Borrowers who expect to sell or refinance before the first adjustment can take advantage of the lower initial cost, while planning to exit the loan before the rate spikes.

Cons

  • Complex structure: ARMs include indexes, margins, and caps that can be confusing and make it harder to anticipate future costs.
  • Higher risk if rates rise sharply: Even with caps, a strong market increase could raise your payment significantly over time.
  • Uncertain future payments: Once the fixed period ends, your rate and monthly payment can rise, making long-term budgeting or saving more difficult.

Choosing the Right Mortgage for Your Goals

Choosing between a fixed-rate and an ARM will depend on a few things. First, you’ll need to take into account your current financial situation. Then, consider your long-term plans or investment needs. Finally, you’ll have to be honest about your risk tolerance. 

If you’re looking for stability, or you plan on staying in your home for more than just a few years, a fixed-rate loan is probably the best option. This is also going to be the case if you have a low risk tolerance or need predictable budgeting year-over-year. In all of these cases, fixed-rate mortgages are the best option. You’ll get a locked interest rate and payments that you can count on for the duration of the loan.

An adjustable-rate loan could be a better choice if you project you’ll have more income in the next few years. If you plan to move or refinance in less than 5 years, taking advantage of that lower rate might be a solid strategy. Before making any final decisions, though, be sure you go over some payment change calculations. See what could happen with specific rate adjustments after your intro period. 

It’s also never a bad idea to think about the myriad factors outside your sphere of influence. Consider what inflation may look like in a decade. Think about your personal savings ability and behavior. 

To get a better picture of what it may mean for your finances, consider a chat with a trusted local lender. A short conversation can help you put things in context for you with real numbers. You’ll also have the chance to ask any questions about your financing needs or anything else you may think of. 

Match Your Mortgage to Your Future

The right mortgage should fit both your lifestyle and your long-term financial comfort. Whether you choose steady payments or the potential flexibility of an adjustable rate, the key is understanding your priorities before you commit.

For personliazed guidance you can trust, reach out to our lending team. Our team is ready to help you get the information you need to make confident financial decisions for you and your family.