What’s the Difference Between Fixed-Rate vs. Adjustable-Rate Mortgages?

home buyers researching the difference between fixed-rate and adjustable-rate mortgages

You may be in the market for a home, but not so fast! Before you start shopping for a home, it’s important to understand financing—more specifically, the difference between a fixed-rate or adjustable-rate (ARM) mortgage. Both have their pros and cons—and it all depends on how long you want to spend in the home and what you can afford to pay monthly. Let’s take a deep dive into the differences.

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What is a Fixed-Rate Mortgage?

A fixed-rate mortgage sounds like what it is—fixed. Here’s how it works: you have a predictable monthly payment for the life of loan, whether a 15-, 20- or 30-year loan. The duration of the loan impacts the size of the monthly payment, amount of interest paid, amount of time to build equity, and length of time to pay off the loan. In other words, the longer the payoff period, the lower the monthly payment. On the other hand, lower term loans have higher monthly payments and pay less interest over the life of the loan, take less time to build equity and pay off the mortgage faster.

Is a Fixed-Rate Mortgage Right for You?

If you’re considering staying in the home long term, say more than 10 years, a fixed-rate mortgage may be right for you. If you’re a first-time homebuyer, a fixed-rate mortgage may be a smart (and safe) choice. A fixed-rate mortgage gives you prediction—and peace of mind—knowing your monthly payment is the same regardless of whether or not interest rates rise. Is there a downside to fixed-rate mortgages? A small one—if interest rates are high when you first apply for the loan, it’s harder to qualify because the monthly payments are also high.

What is an Adjustable-Rate Mortgage?

Now let’s explore an adjustable-rate mortgage, commonly called an ARM. For the first five to 10 years of the loan, you’ll pay a lower rate and monthly payment than if you had a fixed rate loan. Plus, the rates and payments can be locked in during that time. After that, the interest rate adjusts to market rates and your monthly payments may rise, too. The good news—an ARM has a cap, a limit that your interest rate can rise or drop to in a single period and over the lifetime of your loan.

Is an Adjustable-Rate Mortgage Right for You?

What type of homebuyer would benefit from a variable rate mortgage? An ARM mortgage can be a viable option if you’ll be moving in a few years—you’ll have a lower rate at the start of the loan and lower monthly payment than with a fixed-rate loan. Of course, you’ll have to make a larger down payment and have a strong credit history, so you have to be prepared with more cash in hand and no red marks on your credit.

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Is One Better than the Other?

That all depends! If you’re settling in for the long term, a fixed-rate mortgage may be your best choice. If you’re staying for a few short years and you have the means and credit to be approved for an ARM, go for it! You’ll pay less out of pocket over the course of this shorter term loan. But bottom line—what’s the difference in dollars and cents?

Check out our mortgage calculator. Here, you’ll see how much you’ll save or pay over the course of 30 years, for instance, on a fixed-rate loan. Our Mortgage Required Income Calculator can also show you how much income you need to afford a $300,000 home (or any home)!


Fixed or adjustable rate mortgage? We’ve given you the basics on the difference between the two, from predictable, fixed payments over the long term, to a lower rate, bigger down payment and shorter term loan. Before you take your next step, give Capital Bank a call to help you determine which is right for you—because the better informed you are, the better the financial decision you’ll make.

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Is adjustable or fixed better?
That all depends on your needs. Staying in the home more than 10 years? A fixed-rate mortgage may be right for you. If your plans include a move in under 10 years, an ARM mortgage may be able to save you money with a low 5-year ARM rate or 10-year ARM rate.

Is an adjustable loan or a fixed loan better for a first-time buyer?
Most mortgage lenders agree that a fixed-rate loan is optimal for a first-time buyer. The predictable payments help them sleep at night and keep their budget under control.

Why would an adjustable-rate mortgage be a bad idea?
An adjustable-rate mortgage would not be a smart choice if in it for the long term, past 10 years, for instance. Your initial interest rate and monthly payment would increase after the 10 year-period. There’s no prediction on the new rate and payment, and that can cause a big dent in your budget.

Why would a home buyer choose an adjustable rate mortgage?
If you plan on staying in the home short-term, you can benefit from a 5-year ARM rate or 10-year ARM rate. In both cases, the rate would be lower than a fixed-rate loan. To qualify, you need an excellent credit history and larger down payment.