Loan types

Fixed-rate vs adjustable-rate mortgages: which is right for you?

By the HomeBuyerMap team · Updated October 20, 2026

Most buyers default to a 30-year fixed, and for many that's the right call. But an adjustable-rate mortgage can save real money for the right buyer — as long as you understand exactly how and when the rate can change.

How a fixed-rate mortgage works

The interest rate is set at closing and never changes. Your principal and interest payment stays identical for the full term, usually 30 or 15 years. Taxes and insurance in your escrow payment can still change, but the loan part can't. The trade-off: fixed rates are usually higher than an ARM's starting rate.

How an ARM works

An ARM has two phases. During the initial fixed period the rate doesn't move. After that it adjusts on a schedule. The name tells you both: a 7/6 ARM is fixed for 7 years, then adjusts every 6 months. Most conventional ARMs today are 5/6, 7/6 or 10/6.

Each adjustment resets your rate to the index plus the margin. The index for most new ARMs is SOFR (the Secured Overnight Financing Rate), which moves with the market. The margin is a fixed number set in your loan, often around 2.75% to 3%.

Rate caps limit how far it can move

ARMs have three caps, often written like 5/1/5:

• Initial cap (5): the most the rate can rise at the first adjustment
• Periodic cap (1): the most it can rise at each later adjustment
• Lifetime cap (5): the most it can ever rise above the starting rate

So a 5.75% ARM with a 5% lifetime cap can never exceed 10.75%. Always ask the lender for the worst-case payment.

A real example

On a $400,000 loan, a 30-year fixed at 6.5% costs about $2,528 a month in principal and interest. A 7/6 ARM at 5.75% costs about $2,334 — roughly $194 a month less, or about $16,300 over the 7-year fixed period. If you sell or refinance within those 7 years, you keep the savings. If you stay and rates are higher, the payment can rise above the fixed-rate payment.

Side by side

When an ARM makes sense

• You expect to sell or move before the fixed period ends (job relocation, starter home)
• You expect a meaningful income increase and can absorb a higher payment
• The rate gap between fixed and ARM is large

Avoid an ARM if you're stretching to qualify, plan to stay indefinitely, or would struggle if the payment rose at the first adjustment. Lenders often qualify ARM borrowers at a higher rate for this reason.

Frequently asked questions

Can I refinance an ARM into a fixed rate?

Yes, if you qualify at the time. But refinancing depends on your credit, income, home value and market rates when the fixed period ends, so don't count on it as your only plan.

Is a 15-year fixed better than a 30-year fixed?

A 15-year fixed has a lower rate and far less total interest, but a much higher monthly payment. A 30-year gives a lower payment and more flexibility; you can still prepay principal to shorten it.

Are ARMs riskier than they were in 2008?

Much less so. Today's ARMs require full income verification, are underwritten to handle higher payments, and have firm caps. The risky teaser-rate and negative-amortization loans of that era are largely gone.

This article is educational and general in nature. Loan eligibility, rates, and requirements vary by lender, loan program, and your individual situation. Confirm specifics with a licensed lender.