Fixed-rate vs adjustable-rate mortgages (ARMs): how they work and how to choose
A fixed-rate mortgage keeps the same interest rate, and the same principal-and-interest payment, for the whole loan. An adjustable-rate mortgage (ARM) has a fixed rate for an initial period (for example 5, 7 or 10 years) and then changes periodically based on a market index plus a margin, within caps. ARMs can start lower, but your payment can rise. The CFPB's advice: only choose an ARM if you could afford the highest payment the loan allows.
How a fixed-rate mortgage works
With a fixed-rate loan, your interest rate is set at closing and never changes. Your monthly principal and interest stays the same; only taxes, insurance and any mortgage insurance in your escrow payment can change. The trade-off is that you don't benefit if market rates fall unless you refinance (which has costs).
How an ARM works
The CFPB's Consumer Handbook on Adjustable-Rate Mortgages explains the moving parts:
- Initial period. The rate is fixed for a set time. A "5/6 ARM" is fixed for 5 years and then adjusts every 6 months; a "7/1 ARM" is fixed for 7 years and then adjusts every year.
- Index. A published market rate the loan follows after the initial period (many newer ARMs use SOFR, the Secured Overnight Financing Rate).
- Margin. A fixed number of percentage points the lender adds to the index. Index + margin = your new rate.
- Caps. Limits on how much the rate can rise at the first adjustment, at each later adjustment, and over the life of the loan.
Fixed vs ARM at a glance
| Fixed-rate | ARM | |
|---|---|---|
| Payment predictability | Principal and interest never change | Can rise or fall after the initial period |
| Starting rate | Usually higher than an ARM's initial rate | Often lower at first |
| If rates fall | Must refinance to benefit | May fall at adjustment (floors may apply) |
| Main risk | Paying more than needed if rates fall | Payment shock if rates rise |
Questions to ask before choosing an ARM
- What is the highest payment possible under the lifetime cap, and could I afford it?
- Which index does the loan use, what is the margin, and what are all the caps?
- Is there a prepayment penalty if I refinance or sell?
- Could the payment ever fail to cover the interest (negative amortization)? Avoid loans where it could.
- How long do I really expect to keep this loan? If you'll likely sell or refinance before the first adjustment, an ARM's lower start can save money; if not, you carry the risk.
Check the "Projected Payments" table and the "Adjustable Interest Rate (AIR) Table" on page 2 of the Loan Estimate. Our mortgage calculator lets you test the payment at the cap rate.
Frequently asked questions
What does 5/6 ARM mean?
The rate is fixed for the first 5 years and then adjusts every 6 months, based on an index plus a margin and limited by the loan's caps.
Are ARMs a bad idea?
Not necessarily. The CFPB advises considering an ARM only if you could afford the maximum payment allowed by the caps. They can make sense if you expect to sell or refinance before the rate adjusts, but that plan carries risk.
Where do I find an ARM's caps?
On page 2 of the Loan Estimate, in the Adjustable Interest Rate (AIR) Table, along with the index and margin.
Can a fixed-rate mortgage payment go up?
The principal and interest can't. Your total monthly payment can still change if property taxes, homeowners insurance or mortgage insurance paid through escrow change.
Sources
- CFPB: Consumer Handbook on Adjustable-Rate Mortgages (PDF) (accessed October 29, 2026)
- CFPB: Understand loan options (accessed October 29, 2026)
- CFPB: Loan Estimate explainer (accessed October 29, 2026)
- CFPB: What is a prepayment penalty? (accessed October 29, 2026)
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