Fixed-Rate vs. Adjustable-Rate Mortgages: Pros, Cons and How to Choose

A fixed-rate mortgage keeps the same interest rate and principal-and-interest payment for the life of the loan. An adjustable-rate mortgage, or ARM, has a fixed rate for an initial period, usually five, seven or 10 years, and then adjusts on a set schedule. A fixed rate costs you certainty; an ARM may start lower but shifts the risk of future rate increases to you.

For most buyers who plan to stay put, a fixed rate is the simpler choice. An ARM can make sense when you're confident you'll sell or pay down the loan before the fixed period ends, and you could handle the higher payment if you don't.

I'm Paul Mattos, a mortgage broker with Refine Mortgage, licensed in North Carolina and South Carolina. I compare fixed, adjustable and buydown options side by side so buyers can see the tradeoffs before they lock.

How a Fixed-Rate Mortgage Works

Your interest rate never changes, so your principal and interest payment stays the same from the first payment to the last. Common terms are 30, 20 and 15 years. Shorter terms usually have lower rates and less total interest, with higher monthly payments.

Your total payment can still change if your property taxes, homeowners insurance or mortgage insurance change.

Pros

• Predictable principal and interest for the whole loan

• Protection if market rates rise

• Simple to understand and budget

Cons

• The starting rate is often higher than an ARM's

• If rates fall, you'd need to refinance to benefit, which has costs and isn't guaranteed

How an Adjustable-Rate Mortgage Works

Most ARMs today are named with two numbers, such as 5/6, 7/6 or 10/6:

• The first number is how many years the starting rate stays fixed.

• The second number means the rate adjusts every six months after that.

After the fixed period, your rate is set by adding a fixed margin to a market index, most commonly SOFR. Caps limit how much the rate can change at the first adjustment, at each later adjustment and over the life of the loan. Ask your lender for the exact caps and the highest rate the loan could reach, because they vary by product.

Pros

• The starting rate is often lower than a fixed rate, though the gap varies with the market and sometimes there's little difference

• Lower early payments can help if you're confident you'll sell or pay down the loan before the first adjustment

• Common in jumbo lending, where ARM pricing can be more competitive

Cons

• Your payment can rise, sometimes significantly, after the fixed period

• More moving parts to understand: index, margin and caps

• Refinancing before an adjustment is never guaranteed, since rates, home values and your qualifications can change

Does an ARM Help You Qualify for More?

Not as much as many buyers expect. For conventional loans, an ARM with a fixed period of five years or less generally must be qualified at a higher rate than the starting rate. ARMs with longer fixed periods, like 7/6 and 10/6, generally qualify closer to the starting rate. Ask your lender which qualifying rate applies before assuming an ARM increases your budget.

Fixed vs. ARM: Which Fits You?

A Fixed Rate Often Fits When You:

• Plan to stay in the home for many years

• Want predictable payments

• Are buying your first home or working with a tight budget

• Would be uncomfortable with a payment increase

An ARM May Fit When You:

• Expect to sell or move before the fixed period ends, for example because of a planned relocation

• Plan to pay the loan down substantially, such as with an expected sale of another property

• Have the income and savings to handle a higher payment if plans change

• Are financing a jumbo loan where ARM pricing is meaningfully better

If you're not sure how long you'll stay, that uncertainty is usually a point in favor of a fixed rate.

What About a Temporary Buydown?

A temporary buydown, such as a 2-1 buydown, is different from an ARM. You get a fixed-rate loan, but your rate is reduced for the first year or two, often paid for with seller or builder credits. After that, the payment returns to the full fixed note rate and stays there. There's no market risk, but you generally qualify at the full note rate.

A permanent buydown uses discount points to lower the fixed rate for the life of the loan. My guide to how seller credits can lower your payment explains how credits can pay for either.

Questions to Ask Before Choosing

1. How long do I realistically plan to keep this home and this loan?

2. What's the difference between the fixed and ARM starting rates today, including points?

3. For the ARM, what are the index, margin and caps, and what's the highest possible rate?

4. What would my payment be at the first adjustment if rates rose to the cap?

5. Which rate am I being qualified at?

6. Would a temporary or permanent buydown on a fixed rate work better?

How I Help You Compare

I put the options side by side for the home you're buying: a fixed rate, an ARM, and fixed-rate buydown options, including the payment, points, cash to close and, for ARMs, the payment at the first adjustment if rates rise to the cap. That makes the tradeoff concrete instead of theoretical.

For more on comparing pricing, see my guide to finding the best mortgage rates in Charlotte. If you're new to mortgages, start with how mortgages work. If your loan amount is near the conforming limit, see conforming vs. jumbo loans. Already have an ARM? My refinance guide covers switching to a fixed rate. You can read what past clients say on my reviews page.

Fixed vs. ARM FAQs

Is an ARM always cheaper at the start?

Usually the starting rate is lower, but not always. The gap depends on the market and the loan, and sometimes it's small enough that a fixed rate makes more sense.

What does 5/6 ARM mean?

The rate is fixed for the first five years, then adjusts every six months based on an index plus a margin, within the loan's caps.

Can I refinance before my ARM adjusts?

Possibly, but it isn't guaranteed. Rates, your home's value and your qualifications may be different when the time comes.

Is a 2-1 buydown the same as an ARM?

No. A buydown temporarily lowers a fixed-rate payment, then returns to the fixed note rate. An ARM's rate can keep changing with the market.

Compare Your Options

If you're buying or refinancing in North Carolina or South Carolina and want to see fixed and adjustable options side by side, I'm glad to run the numbers for you. We can talk by phone or video.

Schedule a mortgage consultation or start your mortgage application.

Paul Mattos Mortgage Broker | Refine Mortgage Carolina Home Financing NMLS# 2339069 | Licensed in NC and SC Call or text: 980-221-4959 Email: paulm@refinemortgage.net

Refine Mortgage Inc. | NMLS# 2417960 | Equal Housing Lender. This article provides general educational information and is not a commitment to lend, a rate quote, or an offer of specific credit terms. Adjustable-rate mortgage payments can increase after the initial fixed period. Approval, pricing, and program availability depend on credit, income, assets, property, appraisal, and underwriting requirements. Not all applicants will qualify.