Fixed vs Adjustable Rate Mortgage: How to Choose

Few mortgage choices get as much debate as the fixed vs adjustable rate mortgage question. Both are real, legitimate loans. They simply hand different risks to different people. With a fixed rate, you carry less uncertainty. With an adjustable rate, you may start with a different payment and accept that it can change later. My job is to help you see which risk fits your life, not to push one product.

The Consumer Financial Protection Bureau (CFPB) defines a fixed-rate mortgage as a loan where the interest rate is set when you take out the loan and doesn't change during the term. Your principal and interest payment stays the same.

An adjustable-rate mortgage (ARM) is a loan where the interest rate can change, usually in relation to an index. An ARM begins with an introductory period. When that period ends, the CFPB explains, your rate will change at regular intervals based on a new index plus a set margin, subject to any caps. I explain those parts step by step in how adjustable rate mortgages work, so here I'll stay focused on the decision.

Is a fixed rate or an adjustable rate better?

Neither is better for everyone. The CFPB suggests a fixed rate if you want predictable payments or plan to stay a long time, and says an ARM may fit if you can afford the maximum payment or plan to sell within a short period.

Can my payment go down on an adjustable-rate loan?

Sometimes. The CFPB says that when interest rates decline, your payment may go down, but that isn't true for all ARMs, and some loans limit how much the rate can decrease. Don't count on a decrease.

Can I switch from an ARM to a fixed rate later?

Some ARMs include a conversion option, which the CFPB says lets you convert to a fixed-rate loan under a formula in your loan documents, sometimes for a fee. You can also refinance, but approval isn't guaranteed. Ask the lender up front.

Should I pick an ARM because I plan to refinance?

I wouldn't make that the whole plan. The CFPB warns against counting on being able to refinance before your rate and payment increase, since your home's value or your finances may change.