Fixed-Rate vs. Adjustable-Rate Mortgage: How to Choose in Today’s Market
May 29, 2025
If you’re in the market for a house, one of the most important decisions is whether to opt for a fixed- or adjustable-rate mortgage.
A fixed-rate mortgage is just what it sounds like. Whatever interest rate your mortgage carries, that’s the rate you’ll be charged every year until you either sell your house or refinance.
An adjustable-rate mortgage (ARM) is more complicated. It will start with a fixed rate for a certain period, such as three, five, seven, or ten years. (That initial rate is often lower than the rates on fixed-rate mortgages.) After the initial fixed-rate period, the interest rate is subject to change and will be based on one of several factors, such as the prime rate (a benchmark interest rate banks use when setting rates for various loans). In addition, the lender will add a fixed “margin,” which is one or more percentage points of interest—basically, the bank’s profit margin.
How often the rate adjusts varies by lender. Some ARMs adjust monthly, others every six months, and still others every year. When reviewing the terms of an ARM, you will see two numbers displayed like this: “5/6m.” In this case, the initial rate is fixed for five years and then adjusts every six months.
If you are considering an adjustable-rate mortgage, you will typically have some protections that govern how high the interest rate can go. There will be caps on how much it can increase each time there’s a change and over the life of the loan.
How to choose
If interest rates are low and you plan to stay in your home for more than five years, a fixed-rate loan may be your best option. It provides certainty, protecting you from possible increases in interest rates. However, an ARM may be the better choice when interest rates are high and you plan to stay in your home for less than the loan’s fixed-rate period. Or maybe you believe interest rates will be lower by the end of that period, and you could refinance at that point.
One important factor to keep in mind if you’re considering an ARM: how realistic is it that you will sell or refinance by the end of the initial fixed-rate period? Is it possible that you’ll end up staying longer than you assume? And how likely is it that interest rates will come down? Of course, it’s impossible to predict the future. The point is simply to be as realistic as possible with your assumptions, especially about how long you are likely to stay in the house.
Run the numbers
Find out how much your monthly payments would be with either type of loan. With an ARM, also consider a worst-case scenario—you end up staying in the home past the initial fixed-rate period and rates go up by the maximum amount allowed by the cap. Would you still be able to afford the home?
If you’re considering an ARM, review the terms and payment amounts for several loans. For example, a 5/1 (five years at a fixed rate, then adjustable every year) and a 10/6m (10 years at a fixed rate, then adjustable every six months). The 5/1 is likely to have a lower interest rate for the fixed period, but if the 10/6m still has a lower interest rate than a 30-year fixed-rate loan, and if you think you may be in the home longer than five years, the 10/1 might be the better option.
Once you’ve picked out a house and negotiated a fair price, you might think the most important work is over. It isn’t. Now it’s time to pick out the right mortgage. Choosing wisely is very much part of what will make the house your home.
If you’re in the market for a house, check out CCCU’s home loans. Their rates are lower than current market rates to help you save more money.
Matt Bell is the author of Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.
