Fixed or Variable-Rate Mortgage

Fixed or Variable-Rate Mortgage: Which Is Right for You?

When you're comparing mortgage options, one of the biggest decisions you'll make is whether to choose a fixed-rate or variable-rate mortgage.

A fixed-rate mortgage gives you the certainty of an interest rate that stays the same for the life of the loan. A variable-rate mortgage, often called an adjustable-rate mortgage (ARM), can start with a lower rate but may change over time.

Neither option is automatically better. The right choice depends on your finances, how long you expect to own the home, and how comfortable you are with the possibility of your mortgage payment changing in the future.

Let's look at how both options work and what to consider before making your decision.

What Is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, your interest rate is set when you take out the loan and doesn't change during the loan term. This means your principal and interest payment remains consistent from month to month.

That predictability is one of the biggest reasons buyers choose a fixed-rate mortgage. You can plan your housing expenses without worrying that an increase in market interest rates will cause your mortgage payment to rise.

A fixed-rate mortgage can be particularly appealing if you expect to stay in your home for many years and prefer long-term stability.

It's worth remembering that your total monthly housing payment can still change. Property taxes, homeowners insurance, and mortgage insurance, when applicable, can increase or decrease even when your mortgage interest rate stays fixed.

What Is a Variable-Rate Mortgage?

A variable-rate mortgage, commonly referred to as an adjustable-rate mortgage or ARM, works differently.

An ARM typically starts with an initial period during which the interest rate remains fixed. After that period, the rate can adjust periodically based on market conditions and the specific terms of your loan.

For example, a 5/1 ARM generally has a fixed interest rate for the first five years before the rate begins adjusting, typically once per year. Other ARM structures have different initial fixed periods and adjustment schedules.

The main attraction is that an ARM may offer a lower initial rate than a comparable fixed-rate mortgage. The trade-off is that your rate and monthly principal and interest payment can increase after the initial period.

Fixed vs. Variable: What's the Difference?

The simplest way to think about the two options is certainty versus flexibility.

Fixed-rate mortgage

Interest rate: Stays the same
Initial rate: May be higher
Payment predictability: Higher
Long-term rate risk: Lower
Potential benefit: Stable payments
May suit: Long-term homeowners

Variable-rate mortgage

Interest rate: Can change over time
Initial rate: Often lower
Payment predictability: Lower
Long-term rate risk: Higher
Potential benefit: Lower initial payment
May suit: Buyers with shorter-term plans or greater flexibility

With a fixed-rate mortgage, you know your interest rate won't increase because of changes in the market. With an ARM, you accept the possibility of future rate increases in exchange for the potential benefit of a lower initial rate.

When Does a Fixed-Rate Mortgage Make Sense?

A fixed-rate mortgage may be worth considering if you value predictable payments and expect to remain in your home for a long time.

For example, if you're buying a home that you expect to keep for 10 years or more, having a stable interest rate can make long-term budgeting easier. You also don't have to worry about whether mortgage rates will rise in the future.

A fixed rate can also make sense if a potential increase in your mortgage payment would put pressure on your budget. Even if an ARM starts with a lower payment, you need to be comfortable with what could happen if the rate increases later.

The downside is that you may pay a higher initial rate than you would with an ARM. If you move or refinance relatively soon, you may not benefit from the long-term stability that comes with a fixed-rate loan.

When Could a Variable-Rate Mortgage Make Sense?

An ARM may be worth considering if you expect your circumstances to change before the loan's initial fixed period ends.

For example, someone who expects to move within a few years may be interested in an ARM's potentially lower initial rate. However, you shouldn't assume you'll be able to sell or refinance before the rate adjusts. Your plans, home value, financial situation, and future mortgage rates can all change.

An ARM can also be worth considering for borrowers who have enough financial flexibility to handle a higher payment if rates increase.

The important thing is to look beyond the initial rate. A low introductory rate doesn't tell you what your mortgage could cost after the initial period ends.

What Should You Know Before Choosing an ARM?

If you're considering an adjustable-rate mortgage, pay close attention to how the loan can change.

Initial fixed period: How long does your starting interest rate remain fixed?

Adjustment frequency: How often can your interest rate change after the initial period?

Index and margin: These are used to determine the new interest rate when the loan adjusts.

Rate caps: Caps limit how much your interest rate can increase or decrease at each adjustment and over the life of the loan.

Maximum potential payment: Ask your lender what your payment could look like if rates rise significantly.

These details can make two ARMs with similar starting rates behave very differently, so it's important to compare the full loan terms rather than focusing only on the initial rate.

Don't Choose Based on Today's Rate Alone

It's easy to look at two mortgage offers and focus on which one has the lower rate today. But the starting rate is only part of the picture.

With a fixed-rate mortgage, today's rate is also the rate you'll have throughout the loan term, unless you refinance later.

With an ARM, the starting rate may be lower, but the rate can change after the initial fixed period. That means you need to consider how the mortgage could perform under different future rate scenarios.

A mortgage that looks cheaper today isn't necessarily cheaper over the time you actually own the home.

So, Which Mortgage Is Right for You?

There's no universal answer.

A fixed-rate mortgage may be a better fit if you want predictable payments, plan to stay in your home for many years, or simply don't want to take on the risk of changing interest rates.

A variable-rate mortgage may be worth considering if you expect to move before the adjustment period, want a potentially lower initial payment, and have enough financial flexibility to handle future rate changes.

The best choice comes down to more than the interest rate. Consider your budget, how long you expect to own the home, your plans for the future, and how comfortable you are with uncertainty.

If you're not sure which option makes sense, comparing both side by side with a mortgage professional can help you understand the trade-offs before you commit.

Ready to Compare Your Mortgage Options?

Whether you're looking for the stability of a fixed-rate mortgage or the flexibility of an adjustable-rate option, the right loan should fit your plans—not the other way around.

Talk with our team to compare your options and find a mortgage that works for your goals.