Fixed vs Variable Rate Mortgage: Which Is Right for You?
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Introduction
The mortgage rate type you choose — fixed or adjustable — affects your monthly payment, your risk exposure, and the total cost of your loan over its entire life. It is one of the most consequential decisions you will make during the home-buying process, yet many borrowers spend far more time shopping for a house than they do evaluating their financing options.
A fixed-rate mortgage offers certainty: your interest rate and monthly payment never change. An adjustable-rate mortgage (ARM) offers a lower starting rate in exchange for the possibility that your rate — and your payment — could rise in the future. Neither option is inherently better. The right choice depends on how long you plan to keep the loan, your tolerance for risk, and where you believe interest rates are headed.
This guide explains exactly how each mortgage type works, compares them side by side, walks through real-world cost scenarios on a $400,000 loan, and helps you determine which option fits your situation. At the end, you can use our free calculators to model your specific numbers.
How Fixed-Rate Mortgages Work
A fixed-rate mortgage locks in your interest rate for the entire term of the loan. Whether rates in the broader economy rise to 10% or fall to 3%, your rate stays exactly the same. Your monthly principal and interest payment is calculated once at closing and never changes.
The most common fixed-rate terms are 30 years and 15 years. A 30-year term spreads payments over a longer period, resulting in lower monthly payments but significantly more total interest paid. A 15-year term comes with higher monthly payments but builds equity faster and costs far less in total interest.
Rate is locked for the entire term
Whether you choose a 15-year or 30-year term, the interest rate you agree to at closing is the rate you pay on every single payment. There are no surprises, no adjustments, and no uncertainty.
Predictable monthly payments
Your principal and interest payment remains constant for the life of the loan. While property taxes and homeowners insurance may change, the largest component of your housing payment stays the same, making budgeting straightforward.
Typically a higher starting rate than ARMs
Because the lender bears the risk of future rate increases, fixed-rate mortgages usually carry a higher initial rate than adjustable-rate mortgages. This premium is the price you pay for certainty.
Simple to understand
Fixed-rate mortgages have no caps, margins, indexes, or adjustment schedules to worry about. What you see at closing is what you get for the next 15 or 30 years.
How Adjustable-Rate Mortgages (ARMs) Work
An adjustable-rate mortgage starts with a fixed interest rate for an initial period, then adjusts periodically based on market conditions. The name of the ARM tells you its structure: a 5/1 ARM has a fixed rate for 5 years, then adjusts once per year. A 7/1 ARM is fixed for 7 years, and a 10/1 ARM is fixed for 10.
After the initial fixed period, your rate is recalculated annually using a simple formula:
ARM Rate Formula
New Rate = Index (SOFR) + Margin
The index is a benchmark rate (most commonly SOFR) that fluctuates with the market. The margin is a fixed percentage (typically 2–3%) set by your lender at origination and does not change.
To protect borrowers from extreme rate swings, ARMs include rate caps that limit how much the rate can change:
- Initial adjustment cap — limits the rate change at the first adjustment (e.g., 2% or 5%)
- Periodic adjustment cap — limits each subsequent annual adjustment (typically 2%)
- Lifetime cap — sets the absolute maximum rate over the life of the loan (typically 5% above the initial rate)
These caps are expressed as a three-number structure. A 2/2/5 cap means the rate can increase by up to 2% at the first adjustment, up to 2% at each subsequent adjustment, and up to 5% over the life of the loan. A 5/2/5 cap allows a larger initial adjustment of up to 5%, which is common on 7/1 and 10/1 ARMs with longer fixed periods.
For example, if you start a 5/1 ARM at 5.5% with a 2/2/5 cap structure, your rate can never exceed 10.5% (5.5% + 5% lifetime cap), and it cannot jump by more than 2% at any single adjustment.
Side-by-Side Comparison
Here is how fixed-rate mortgages and adjustable-rate mortgages compare across the factors that matter most to borrowers.
| Factor | Fixed Rate | ARM (5/1) |
|---|---|---|
| Initial rate | Higher (e.g., 6.5%) | Lower (e.g., 5.5%) |
| Rate stability | Locked for full term | Fixed 5 yrs, then annual |
| Payment predictability | Fully predictable | Predictable initially, then variable |
| Best when rates are... | Low or rising | High or falling |
| Risk level | Low | Moderate to high |
| Total interest if rates rise | Unaffected | Increases significantly |
| Total interest if rates stay flat | Higher than ARM | Lower than fixed |
| Total interest if rates fall | Higher (unless refinanced) | Decreases automatically |
| Refinance pressure | None | High near first adjustment |
* Comparison assumes a 30-year fixed at 6.5% vs. a 5/1 ARM starting at 5.5% with a 2/2/5 cap structure. Actual rates and terms vary by lender, credit profile, and market conditions.
When to Choose a Fixed-Rate Mortgage
You plan to stay in the home for 10+ years
The longer you hold a mortgage, the more you benefit from rate certainty. Over a 10-, 20-, or 30-year horizon, an ARM has plenty of time to adjust upward, potentially costing you far more than a fixed rate would have. If this is your forever home (or close to it), fixed is the safer bet.
You value payment stability above all else
If knowing your exact housing payment every month for the next 30 years gives you peace of mind, a fixed-rate mortgage delivers that. There is no need to watch interest rate markets, worry about adjustment dates, or plan a refinance strategy.
Interest rates are historically low
When rates are at or near historic lows, locking in a fixed rate lets you benefit from those low rates for decades. If rates rise later, you are protected. If they fall further, you can always refinance.
You are risk averse
If uncertainty about future payments would cause you stress or if your budget has little room for a payment increase, a fixed-rate mortgage eliminates that risk entirely. You will never face a payment shock.
Budgeting is a top priority
For households on a strict budget or with a fixed income (such as retirees), the predictability of a fixed-rate mortgage makes long-term financial planning significantly easier. You can plan years ahead knowing your principal and interest payment will not change.
When to Choose an Adjustable-Rate Mortgage
You plan to sell or refinance within 5-7 years
If you know you will move for a job, upsize for a growing family, or refinance before the fixed period ends, an ARM lets you capture the lower initial rate without ever experiencing an adjustment. This is the single most common reason borrowers choose ARMs.
You expect interest rates to fall
If current rates are elevated and you believe they will decline over the next several years, an ARM positions you to benefit automatically. As the underlying index drops, your rate adjusts downward without requiring a refinance.
You want lower initial monthly payments
The rate discount on an ARM (often 0.5-1.0% lower than fixed) translates to real savings. On a $400,000 loan, a 1% rate difference means roughly $260 less per month. If cash flow is tight in the early years of homeownership, an ARM provides breathing room.
You are confident in income growth
If your career trajectory strongly suggests higher earnings in the years ahead (for example, a medical resident, early-career attorney, or someone in a rapidly growing field), the risk of a future rate increase is offset by your growing ability to absorb it.
You are comfortable with calculated risk
ARMs are not reckless gambles. With rate caps limiting worst-case scenarios and the ability to refinance, informed borrowers can use ARMs strategically. If you understand the mechanics and have a plan for each scenario, an ARM can save you tens of thousands of dollars.
The Math: Real-World Scenarios
To make this concrete, let us compare a $400,000 loan over 30 years with two options: a 6.5% fixed-rate mortgage and a 5.5% 5/1 ARM with a 2/2/5 cap structure and a 2.75% margin. We will model three rate scenarios after the ARM's initial 5-year fixed period.
Scenario 1: Rates Rise 2% After Year 5
The ARM adjusts from 5.5% up to 7.5% at year 6 (hitting the 2% initial cap), then holds steady as market rates plateau.
| Metric | Fixed 6.5% | 5/1 ARM |
|---|---|---|
| Monthly payment (Yrs 1-5) | $2,528 | $2,271 |
| Monthly payment (Yrs 6-30) | $2,528 | $2,724 |
| Total interest paid | $510,177 | $541,980 |
| 5-year savings with ARM | - | $15,420 |
| 30-year difference | - | ARM costs $31,803 more |
In a rising-rate environment, the fixed-rate mortgage saves you roughly $31,800 over 30 years. However, if you sell or refinance before year 6, the ARM saves you over $15,000.
Scenario 2: Rates Stay Flat
The ARM adjusts based on the index but the index remains stable. The ARM rate stays near 5.5% throughout.
| Metric | Fixed 6.5% | 5/1 ARM |
|---|---|---|
| Monthly payment (all years) | $2,528 | $2,271 |
| Total interest paid | $510,177 | $417,506 |
| 30-year savings with ARM | - | $92,671 |
If rates hold steady, the ARM saves you nearly $93,000 over 30 years — a massive difference driven entirely by the 1% rate gap.
Scenario 3: Rates Drop 1% After Year 5
The index falls, and the ARM adjusts down to approximately 4.5% at year 6.
| Metric | Fixed 6.5% | 5/1 ARM |
|---|---|---|
| Monthly payment (Yrs 1-5) | $2,528 | $2,271 |
| Monthly payment (Yrs 6-30) | $2,528 | $1,965 |
| Total interest paid | $510,177 | $348,240 |
| 30-year savings with ARM | - | $161,937 |
In a falling-rate scenario, the ARM saves you over $161,000 over the life of the loan. The ARM borrower benefits automatically, while the fixed-rate borrower would need to refinance (and pay closing costs) to capture lower rates.
Key Takeaway
The ARM wins in two out of three scenarios and loses in one. But the scenario where the ARM loses (rising rates) is the one where borrowers feel the most pain, because it combines higher payments with the stress of uncertainty. Your decision should be based not just on which scenario you think is most likely, but on which downside scenario you can tolerate.
Model Your Own Mortgage Scenarios
Use our free calculators to compare fixed and adjustable-rate options with your exact loan amount, rates, and timeline. See monthly payments, total interest, and amortization schedules side by side.
Frequently Asked Questions
Can I refinance from an ARM to a fixed-rate mortgage?
Yes. Refinancing from an ARM to a fixed-rate mortgage is one of the most common refinance transactions. Many borrowers take an ARM for the lower initial rate and then refinance into a fixed-rate loan before the first adjustment. Keep in mind that refinancing involves closing costs (typically 2-5% of the loan balance), so you need to make sure the savings from the new rate justify those costs. Your ability to refinance also depends on your credit score, home equity, and market conditions at the time.
What index do most ARMs use?
Most adjustable-rate mortgages in the United States are now tied to the Secured Overnight Financing Rate (SOFR), which replaced the London Interbank Offered Rate (LIBOR) after its phase-out in 2023. SOFR is based on actual overnight lending transactions in the U.S. Treasury repurchase market, making it a more transparent and reliable benchmark. Your ARM rate is calculated as the index value (SOFR) plus a fixed margin (typically 2-3 percentage points) set by your lender at origination.
Is a 7/1 ARM safer than a 5/1 ARM?
A 7/1 ARM provides a longer initial fixed-rate period (7 years vs. 5 years), which gives you more time before your rate adjusts. This makes it somewhat less risky because you have a larger window of predictable payments and more time to sell, refinance, or prepare for rate changes. However, 7/1 ARMs typically carry a slightly higher initial rate than 5/1 ARMs to compensate for the longer fixed period. If you are confident you will sell or refinance within 5 years, a 5/1 ARM may still be the better value.
What happens when my ARM adjusts?
When your ARM reaches its first adjustment date, your lender recalculates your interest rate using the current value of the underlying index (usually SOFR) plus your fixed margin. The new rate is subject to your loan's cap structure: the initial adjustment cap limits how much the rate can change at the first adjustment, the periodic cap limits each subsequent annual change, and the lifetime cap sets an absolute ceiling. Your monthly payment is then recalculated based on the new rate and the remaining loan balance and term. Your lender is required to notify you at least 60 days before any rate change takes effect.
Are ARM rates lower in 2026?
As of early 2026, ARM initial rates are generally 0.5 to 1.0 percentage points lower than comparable 30-year fixed rates. The exact spread depends on the ARM term (5/1, 7/1, or 10/1), your credit profile, and the lender. Whether ARM rates represent a good deal depends on where you think rates are headed. If you believe rates will hold steady or decline over the next several years, an ARM can save you a significant amount of money. If you think rates will rise substantially, a fixed-rate mortgage locks in certainty.