Fixed vs ARM: Choosing the Right Mortgage
One of the biggest decisions when getting a mortgage is choosing between a fixed rate and an adjustable rate. Here's how to decide.
Fixed-Rate Mortgages
A fixed-rate mortgage locks in your interest rate for the entire loan term. Your monthly payment stays the same, regardless of market changes.
- Pros: Predictable payments, protection from rate increases, easier budgeting
- Cons: Higher initial rate, could pay more if rates drop
- Best for: Buyers planning to stay long-term
Adjustable-Rate Mortgages (ARMs)
An ARM starts with a lower fixed rate for a set period (typically 5, 7, or 10 years), then adjusts annually based on market conditions.
- Pros: Lower initial payments, could benefit if rates drop
- Cons: Uncertain payments after fixed period, could increase significantly
- Best for: Short-term buyers or those expecting rate drops
How ARMs Work
ARM rates adjust based on an index (like the SOFR) plus a margin (typically 2-3%). Caps limit how much your rate can increase.
- 5/1 ARM: Fixed for 5 years, then adjusts annually
- 7/1 ARM: Fixed for 7 years, then adjusts annually
- 10/1 ARM: Fixed for 10 years, then adjusts annually
Which Should You Choose?
Consider these factors:
- How long will you stay? Short-term = ARM, Long-term = Fixed
- Risk tolerance: Fixed = predictable, ARM = variable
- Current rate environment: High rates = consider ARM for potential drops