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Comparing Fixed-Rate and Adjustable-Rate Mortgages: What Residential Lenders Offer

Comparing Fixed-Rate and Adjustable-Rate Mortgages: What Residential Lenders Offer

August 10, 2023 by X2 Mortgage

Buying a home is one of the most significant financial decisions you'll ever make. Among the plethora of decisions to be made, one of the most critical is deciding between a Fixed-Rate Mortgage (FRM) and an Adjustable-Rate Mortgage (ARM). The decision could have profound implications for your long-term financial health. This blog post aims to provide a comparison between FRM and ARM to help you make a more informed decision.
Understanding Fixed-Rate Mortgages

Fixed-rate mortgages are one of the most common types of residential home loans offered by lenders. Their key defining characteristic is the constant interest rate that stays the same over the life of the loan, regardless of how market interest rates fluctuate. This provides homeowners with a level of stability and predictability that can be very appealing, especially for those planning to stay in their Buying a home for a long time.

Interest Rate

In a fixed-rate mortgage, the interest rate is set at the loan's initiation and doesn't change throughout its term. This means that if you secure a fixed-rate mortgage at a 4% interest rate, you'll continue to pay interest at this rate until the mortgage is paid off, even if market interest rates rise or fall in the meantime.

The fixed interest rate on these mortgages also leads to fixed monthly payments. This means that the amount you pay each month—comprising both principal repayment and interest—remains the same over the life of the loan. This predictability is a huge benefit for borrowers who prefer a stable and consistent budget.
Term Length

Fixed-rate mortgages typically come in two main term lengths: 15 years and 30 years. The choice of term length will impact the size of the monthly payment (a shorter term means higher payments, but less interest over the life of the loan), and also the overall cost of the loan.

Advantages and Disadvantages of Fixed-Rate Mortgages

Stability and Predictability

One of the greatest advantages of a fixed-rate mortgage is its stability. Since both the interest rate and monthly payments remain unchanged for the duration of the loan, homeowners can budget and plan for the long term without worrying about potential increases in their mortgage payment.

Protection against Inflation

Fixed-rate mortgages also offer a degree of protection against inflation. If market interest rates rise (often a symptom of inflation), your rate stays the same. This can save you money over the long term compared to adjustable-rate mortgages, which could increase with inflation.

Higher Initial Rates

On the downside, fixed-rate mortgages often start with higher interest rates than adjustable-rate mortgages. Lenders charge this premium due to the risk they undertake by locking the rate for a long period.

Understanding Adjustable-Rate Mortgages

An Adjustable-Rate Mortgage, or ARM, is a type of Buying a home loan where the interest rate can change over time. This is in contrast to fixed-rate mortgages, where the interest rate remains the same for the duration of the loan. The rate on an ARM initially stays fixed for a set period, typically for 5, 7, or 10 years, after which it may adjust based on changes in the financial market.

Initial rate and adjustment period

The initial rate of an ARM is often lower than that of a fixed-rate mortgage, making it an attractive option for many borrowers. This rate stays constant during the initial period, usually for a few years. The adjustment period, on the other hand, refers to the frequency at which your interest rate will change after the initial fixed-rate period.

Index and Margin

The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds. Your interest rate will be determined by the sum of the index rate and the margin when it's time for the rate to adjust.

Advantages and Disadvantages of Adjustable-Rate Mortgages

Lower initial rates

One of the primary benefits of an ARM is its lower initial interest rates compared to fixed-rate mortgages. This can be advantageous for borrowers who plan to sell or refinance their home before the end of the initial fixed-rate period.


ARMs can be a great choice for people expecting their income to increase over time, or those who anticipate moving or refinancing before the rate adjusts. In periods of falling interest rates, your rate and monthly payments can decrease over time with an ARM.
Uncertainty and variability

Despite the benefits, ARMs come with a degree of uncertainty. After the initial fixed-rate period, your interest rates and monthly payments can increase. This unpredictability may be stressful for borrowers who prefer stability in their budgeting.

Comparing Fixed-Rate and Adjustable-Rate Mortgages

Fixed-rate mortgages are a popular choice for many homebuyers. As the name suggests, the interest rate for an FRM remains unchanged for the life of the loan. This predictability is its primary advantage, making budgeting easier as you'll know exactly what your mortgage payment will be every month, regardless of market conditions.


FRMs are a great choice if you prefer stability and predictability. If you plan to live in your Buying a home for many years and you like the idea of having a consistent monthly payment, a fixed-rate mortgage may be the better choice for you. This type of loan is particularly appealing during periods of low-interest rates, as it allows homeowners to lock in low rates for the duration of their loan.

When an Adjustable-Rate Mortgage May Be the Better Choice

In contrast to FRMs, adjustable-rate mortgages have interest rates that can fluctuate over time, typically after an initial fixed period. This means the amount you owe in interest can rise or fall based on market interest rates.

ARMs can be advantageous in certain circumstances. If you're planning to live in a home for a short period, an ARM might make more sense. The initial interest rate for an ARM is often lower than that of a fixed-rate mortgage. As such, if you plan to sell your home before the rate adjusts, you could save money on interest payments.


Choosing between a Fixed-Rate Mortgage (FRM) and an Adjustable-Rate Mortgage (ARM) significantly affects your long-term financial health. While FRMs offer the comfort of predictable monthly payments, ARMs provide the potential for reduced interest costs, particularly if interest rates fall or you plan to sell the home in the short term. The broader economic environment and your individual financial circumstances both play pivotal roles in deciding which mortgage type to choose. Ultimately, the decision should align with your financial goals, lifestyle preferences, and risk tolerance. It's essential to seek personalized advice from a financial advisor or lender to navigate this critical decision. Your ideal mortgage type should make homeownership a joy, not a burden.

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