Quick answer
A fixed-rate mortgage keeps the interest rate unchanged for the agreed loan term. An adjustable-rate mortgage (ARM) starts with an initial rate period and can change later based on the loan’s index, margin, adjustment schedule, and caps. The fixed option offers more rate predictability; an ARM can create payment uncertainty after its introductory period.
How a Fixed-Rate Mortgage Works
With a fixed-rate mortgage, the interest rate is established for the loan term and does not adjust with market rates. For a typical fully amortizing fixed-rate loan, the scheduled principal-and-interest payment stays level when payments are made as agreed. The amounts allocated to principal and interest change over time, and escrowed property taxes or insurance can still change the total monthly amount sent to the servicer.
How an Adjustable-Rate Mortgage Works
An adjustable-rate mortgage has an initial period when the interest rate is fixed. After that period, the rate can reset on a schedule stated in the contract. A loan described as a 5/1 ARM generally has an initial fixed rate for five years, followed by adjustments every year—but product structures vary, so the note and disclosures control.
After the introductory period, many ARMs use an index plus a margin to determine the fully indexed rate, subject to contractual caps or floors. The index reflects broader market conditions; the margin is set in the loan agreement. Read the adjustment dates and the maximum possible rate rather than focusing only on the introductory payment.
The CFPB explains how ARM indexes and margins work and provides a consumer handbook on adjustable-rate mortgages.
Fixed-Rate vs. ARM: Key Differences
| Feature | Fixed-rate mortgage | Adjustable-rate mortgage |
|---|---|---|
| Interest rate | Set for the loan term | Fixed initially, then can adjust |
| Principal-and-interest payment | Generally stays level | Can rise or fall after adjustments |
| Predictability | Higher payment predictability | Less predictable after the initial period |
| Initial rate | Does not reset later | May be lower at the start, but not guaranteed |
| Main items to inspect | Rate, APR, points, fees, term | Index, margin, adjustment dates, caps, floors, APR, fees |
ARM Terms to Understand
- Initial fixed-rate period: the time the starting rate remains unchanged.
- Adjustment period: how often the rate can change after the initial period.
- Index: the benchmark rate used in the adjustment formula.
- Margin: the number of percentage points added to the index.
- Initial adjustment cap: the maximum permitted change at the first adjustment, if the contract has one.
- Periodic cap: the maximum change allowed at later adjustment dates.
- Lifetime cap: the maximum rate increase over the life of the loan, if stated.
- Floor: a minimum rate or limit on how far the rate may fall, if the contract includes one.
How Could an ARM Payment Change?
When an ARM adjusts, the new rate and remaining balance are used to determine the payment under the loan terms. If the index rises, the rate and required principal-and-interest payment may rise; if the index falls, the rate may fall, subject to any floor or other contract limits. A payment cap or other special feature can affect how quickly the payment changes and may have consequences for the balance. Ask the lender to show the maximum rate and payment permitted by the contract.
How to Compare the Two Offers
- Compare the same loan amount, term, down payment, property type, and lock period.
- For an ARM, record the initial rate period, adjustment frequency, index, margin, first adjustment cap, periodic cap, lifetime cap, and floor.
- Ask for the initial payment and the maximum possible payment under the contract.
- Compare APR, points, lender credits, origination charges, and closing costs—not only the initial rate.
- Consider whether the payment would remain affordable if the ARM adjusts to its maximum permitted rate.
Use the CFPB checklist for ARM terms to inspect before signing and compare the written Loan Estimate. Our Mortgage Rates guide explains how to compare rate offers, APR, points, and rate locks.
When a Fixed-Rate Structure May Be Worth Comparing
A fixed-rate loan may be easier to budget for when stable principal-and-interest payments are a priority or when you expect to keep the mortgage for many years. That predictability does not make the loan automatically less expensive; compare the interest rate, APR, fees, term, and total cost.
When to Examine an ARM More Closely
An ARM may be worth examining when the borrower understands the adjustment mechanics and can manage the payment if rates rise. Do not base the decision on an expectation that you will sell the property or refinance before the first adjustment. Your plans, property value, income, and market conditions can change.
Related Mortgage Guides
Frequently Asked Questions
Is a fixed-rate mortgage always cheaper than an ARM?
No. The total cost depends on the rate, fees, term, payment changes, and how long the loan is kept. A lower starting ARM rate does not guarantee lower long-term cost.
Can an ARM interest rate go down?
It may, depending on the index and contract. A floor or other adjustment terms can limit how far the rate can fall.
What does 5/1 ARM mean?
It generally refers to an initial fixed-rate period of five years followed by annual adjustments. Confirm the exact terms in the loan documents.
What is the margin on an ARM?
The margin is the number of percentage points added to the selected index after the initial rate period, subject to the loan’s caps and other terms.
Can the total payment on a fixed-rate mortgage change?
Yes. Scheduled principal and interest generally stay level, but escrow amounts for taxes or insurance and other applicable charges may change.
What should I ask before choosing an ARM?
Ask for the index, margin, adjustment schedule, initial and periodic caps, lifetime cap, floor, and maximum possible payment. Make sure you understand whether the payment could become unaffordable.
Sources and Further Reading
These official CFPB resources explain fixed and adjustable rate structures and the terms used in ARM contracts.
- CFPB: Fixed-rate vs. adjustable-rate mortgages
- CFPB: ARM indexes and margins
- CFPB: What to look for in an ARM contract
- CFPB: Consumer Handbook on Adjustable-Rate Mortgages
Educational information only. This guide is not a recommendation to choose a particular loan. Mortgage terms vary by lender and contract. Review the current Loan Estimate and loan documents with a qualified professional before making a decision.