ARM vs. Fixed-Rate Mortgage: Differences and How to Choose

Many home buyers choose a fixed-rate mortgage, but home loans aren't one-size-fits-all. An adjustable-rate mortgage, or ARM, might be worth considering. ARMs tend to start out with lower interest rates — and lower monthly payments — than comparable fixed-rate loans.

Comparing ARM and fixed-rate mortgages will help you choose the home loan that matches your needs and goals.

How a fixed-rate mortgage works

Fixed-rate mortgages have interest rates that stay the same through the life of the loan. The monthly principal and interest stay the same, although payments can fluctuate when the costs of property taxes and insurance change. Most mortgages are fixed-rate loans.

» MORE: 15-year vs. 30-year mortgage calculator

How an adjustable-rate mortgage works

An adjustable-rate mortgage begins with a set interest rate for a specified number of years. After that, the rate is adjusted periodically according to broad market conditions. An ARM's rate is adjusted at regular intervals until the end of the loan term, which is typically 30 years.

The length of an ARM's fixed-rate period is in the name. A 5-year ARM's initial rate will be fixed for five years. The most common ARM terms have initial fixed-rate periods of three, five, seven or 10 years.

After that initial fixed-rate period, most ARMs have rate adjustments every six months. You might find ARMs described as 5/6 or 7/6. The number before the slash refers to how many years the initial rate will be fixed, and the number after the slash refers to the number of months between rate adjustments after the fixed-rate period has expired.

Although ARM interest rates start lower than fixed-rate loan rates, there’s a chance they will reset higher, increasing your mortgage payment. Fortunately, ARMs have caps that limit how much the interest rate can change the first time it's adjusted, in subsequent adjustments and over the lifetime of the loan.