Fixed-Rate Mortgage vs Adjustable-Rate Mortgage
A fixed-rate mortgage keeps the same interest rate for the entire term of the loan. An adjustable-rate mortgage (ARM) starts with a fixed period (typically 5, 7, or 10 years) and then adjusts periodically based on a benchmark rate. They're both common; the right choice depends on how long you'll keep the loan and how rate changes would affect your budget.
Last reviewed on 2026-04-27.
Quick Comparison
| Aspect | Fixed-Rate Mortgage | Adjustable-Rate Mortgage |
|---|---|---|
| Interest rate behaviour | Same for the whole loan | Fixed for an initial period, then adjusts |
| Common terms | 15-year, 20-year, 30-year fixed | 5/1, 7/1, 10/1 ARMs (initial fixed years / adjustment frequency) |
| Initial rate | Often higher than ARM's starting rate | Often lower at the start |
| Payment certainty | High — known for the term | High initially, lower after first adjustment |
| Caps | Not applicable | Periodic and lifetime caps limit how fast and how high the rate can rise |
| Best fit | Long stays; budgets that need certainty | Short stays; borrowers comfortable with adjustment risk |
| Refinance flexibility | Refinance later if rates fall | Often refinanced into fixed before first adjustment |
Key Differences
1. Interest rate behaviour
A fixed-rate mortgage's rate is set at closing and doesn't move. A 30-year fixed at 6% pays the same monthly principal-and-interest amount in year 1 and year 30.
An ARM has a fixed period (5/1 means 5 years fixed, then yearly adjustments) followed by a variable phase. After the initial period, the rate resets to a benchmark plus a margin, subject to caps.
2. Initial rate
Fixed-rate mortgages usually start at a higher rate than ARMs of the same lender at the same time, because the lender is taking on the long-term rate risk.
ARMs typically start at a lower rate. The borrower trades long-term certainty for a lower initial cost — useful if the borrower won't hold the loan past the initial period.
3. Caps
Fixed-rate mortgages don't need caps because the rate doesn't move.
ARMs include caps that limit how fast the rate can rise. Common structure: 2% per adjustment, 5% over the loan's life. Reading those caps tells you the worst-case payment, which is essential before agreeing to an ARM.
4. Risk profile
Fixed-rate shifts long-term rate risk to the lender. Your monthly payment is predictable for decades.
ARMs push rate risk to the borrower. If rates rise after the fixed period, your payment rises (within caps). If rates fall, your payment falls.
5. When ARMs fit
ARMs can make sense when you reasonably expect to sell or refinance before the adjustment period begins.
A 7/1 ARM, for example, is a sensible choice for someone planning to move within seven years — you get the lower initial rate and never see the variable phase.
6. When fixed fits
Fixed-rate makes sense when you plan to stay long-term and want a predictable payment regardless of where rates go.
It's also the standard choice in markets where 30-year fixed-rate mortgages are the norm; in many other countries, longer-term fixed rates aren't available and ARM-style products dominate.
When to Choose Each
Choose Fixed-Rate Mortgage if:
- Long-term homeowners — staying 7–30 years.
- Budgets that can't absorb a rising payment.
- Locking in rates before expected increases.
- Borrowers who value certainty over the lowest possible initial payment.
Choose Adjustable-Rate Mortgage if:
- Buyers who plan to sell or refinance within the initial fixed period.
- Cases where the initial rate gap is large enough to materially affect monthly payments.
- Borrowers comfortable analysing caps and worst-case scenarios.
- Markets and products where fixed-rate alternatives are unavailable.
Worked example
A buyer planning to relocate in 5–7 years takes a 7/1 ARM with a 1-percentage-point lower starting rate than the equivalent 30-year fixed. Over the seven fixed years, she saves significantly on interest and never sees an adjustment because she sells before year 8. A different buyer plans to stay in his home indefinitely; he takes a 30-year fixed at the higher rate and accepts the trade-off for the certainty.
Common Mistakes
- "ARMs caused the 2008 crisis." Toxic ARM products (option ARMs, no-doc loans) contributed; standard ARMs with proper underwriting are not the problem.
- "Fixed is always safer." Safer in the sense of payment certainty, but more expensive if rates fall and you don't refinance.
- "You can always just refinance an ARM." If rates have risen and your home value or credit have dropped, refinancing can be harder than expected.
- "The teaser rate is the rate." The initial fixed rate is real, but only for the initial period. The math should always include the worst-case post-adjustment scenario.
This is general educational information, not personalised advice. See the disclaimer for the full note.