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

ARM rates start low, and payments can go up or down over time. Fixed rates are stable for the life of the loan.

Holden Lewis
Chris Jennings
Michelle Blackford
Updated
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
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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 adjusts periodically based on a benchmark index — most commonly the Secured Overnight Financing Rate (SOFR). SOFR-indexed ARMs, now the standard, typically adjust every six months. This continues until the end of the loan term, which is usually 30 years.

Common ARM terms

The length of an ARM's fixed-rate period is in the name. For example, 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.
You might find ARMs described as 5/6 or 7/6. The number after the slash refers to the number of months between rate adjustments after the fixed-rate period has expired. So, a 7/6 ARM has a seven-year fixed rate, then adjusts every six months after that.

Rate caps

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.
For example, most ARMs typically have the following adjustment caps:
  • An initial adjustment cap of 2 percentage points.
  • A subsequent adjustment cap of 1 percentage point.
  • A lifetime adjustment cap of 5 percentage points.

Example: ARM vs. fixed-rate mortgage payments

5-year ARM
30-year fixed rate mortgage
Mortgage amount: $400,000
Mortgage amount: $400,000
Interest rate: 6.1%
Interest rate: 6.5%
Payment: $2,424 (after five years, this payment will reset using a new interest rate that could increase it)
Payment: $2,528 (this payment will never change as long as you have the same mortgage)
Total paid over first 5 years: $145,440
Total paid over first 5 years: $151,680

Who an ARM is for

If this isn't your forever home, and you'll move in several years, an ARM could be a good choice. You'll get the benefit of a lower introductory rate and payments in the first years of homeownership. Then ideally you'll sell before the fixed-rate period ends.
It's possible that the rate and payments could decrease after the initial fixed-rate period ends. But they may also increase.
You can refinance an ARM into a fixed-rate loan or another ARM. You might choose this option if you keep the home longer than expected, and you want the stability of a fixed interest rate.
» MORE: NerdWallet's picks of best adjustable-rate mortgage lenders

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Who a fixed-rate mortgage is for

A 15- or 30-year fixed-rate mortgage may be right for you if you plan to own the home for the long haul. A fixed-rate mortgage has the advantage of stable, predictable monthly payments because the interest rate can't go up. And if rates drop a few years into your mortgage, you may be able to refinance your mortgage into another fixed-rate loan at a lower rate.
Fixed-rate mortgages are simpler than ARMs, which can make comparing lender offerings easier.

How to decide whether to get an ARM or fixed-rate loan

Is an ARM or a fixed-rate loan better? To choose between them:
  • Think about how long you plan to own the home. An ARM might be worth it if you'll sell the home or pay off the mortgage in 10 years or less. But a fixed-rate mortgage would probably work better if this will be your forever home and you want the certainty of a stable interest rate and monthly payment.
  • If you're considering an ARM, check the caps on how much the interest rate can increase. Then calculate how much your mortgage payment would be if rates rose to those levels. Would you be able to afford the payments? If not, shop for a fixed-rate mortgage.
  • Whether you choose an ARM or a fixed-rate mortgage, shop around and get preapproved with at least three lenders to compare offers.
» MORE: Compare rates for 7-year ARMs and 10-year ARMs
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