Fixed-Rate vs. Adjustable-Rate Mortgage: How to Choose
🇩🇪 Diesen Artikel auf Deutsch lesenA fixed-rate mortgage keeps the same interest rate and principal-and-interest payment for the whole loan, usually 15 or 30 years. An adjustable-rate mortgage (ARM) starts with a fixed rate for 5, 7 or 10 years and then adjusts with the market, within caps. ARMs can make sense if you are confident you will sell or refinance before the fixed period ends; otherwise most buyers prefer the certainty of a fixed rate.
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Your mortgage rate decides how much house you can afford and how much interest you pay over decades. The first big choice is whether that rate stays fixed or can change.
Fixed-rate mortgages
The rate is locked for the life of the loan. Your principal and interest payment never changes, although taxes and insurance in your escrow payment can. The 30-year fixed is the most popular US mortgage because it keeps monthly payments low; the 15-year fixed has a lower rate and saves a lot of interest but has higher payments.
Loan Payment CalculatorMonthly payment and total interestTry the calculator →Try it: a $350,000 loan at 6.5% over 30 years costs about $2,212 a month in principal and interest, with roughly $446,000 in total interest. Over 15 years at 5.9%, the payment rises to about $2,935, but total interest drops to around $178,000.
Adjustable-rate mortgages (ARMs)
An ARM is described by two numbers, such as 7/6: the rate is fixed for 7 years, then adjusts every 6 months. After the fixed period, the new rate equals a market index (usually SOFR) plus a fixed margin set in your loan documents.
Caps limit how far the rate can move, often written like 5/1/5:
- 5 — maximum increase at the first adjustment
- 1 — maximum increase at each later adjustment
- 5 — maximum increase over the life of the loan
Who should choose which?
| Choose a fixed rate if… | Consider an ARM if… |
|---|---|
| You plan to stay 10 years or more | You are likely to move within the fixed period |
| Your budget has little room for higher payments | You expect significantly higher income |
| Rates are low by historical standards | The ARM's starting rate is much lower than fixed rates |
Don't forget refinancing
Borrowers often plan to “refinance later” if rates fall. That can work, but refinancing costs 2–5% of the loan amount in closing costs, and it depends on your income, credit and home value at that time. Never choose a mortgage you can only afford if you refinance.
Points: paying to lower your rate
Lenders let you buy “discount points”: each point costs 1% of the loan and typically lowers the rate by around 0.25 percentage points. Divide the cost by the monthly saving to find the break-even point. If you will keep the loan longer than that, points can pay off.
Frequently asked questions
Can I pay off a mortgage early?
Most US mortgages have no prepayment penalty. Extra payments toward principal shorten the loan and save interest; confirm with your lender how extra payments are applied.
What credit score do I need for the best rate?
Lenders typically reserve their best pricing for scores of about 740 and above. Each step lower can add to your rate or fees.