Buying a Home
Fixed or adjustable rate mortgage: which is right for me?
By Steve Lockhart
The short answer
A fixed rate mortgage holds the same interest rate and the same principal and interest payment for the entire loan term, usually 30 years or 15 years, so your housing payment stays predictable regardless of what happens to rates.
Full answer
A fixed rate mortgage holds the same interest rate and the same principal and interest payment for the entire loan term, usually 30 years or 15 years, so your housing payment stays predictable regardless of what happens to rates. An adjustable rate mortgage, or ARM, holds a fixed rate for an initial period, commonly 5, 7, or 10 years, and then adjusts on a schedule, often once a year, based on a published index plus the lender's margin, with caps that limit how much the rate can change at each adjustment and over the life of the loan. The choice is really a question of certainty versus cost. A fixed rate is the safer default for buyers who expect to stay in the home for many years, because a rising rate environment never touches their payment. An ARM can make sense when you expect to move or refinance before the initial fixed period ends, because the initial rate is typically lower, and the risk of rate increases is limited to the years you actually plan to be in the home. The risk is real, not hypothetical: if your plans change and you stay longer than expected, your payment can rise, and the caps limit the rise but do not stop it. No one can reliably predict where rates are headed, so I do not advise choosing a loan on a prediction. I advise comparing the fixed payment against the ARM's realistic worst case across the time you expect to own the home, and picking the structure that lets you sleep at night. Ask the lender for the caps, the index, the margin, and the rate at the first adjustment, and ask what the payment would become if the rate rose to the maximum cap. The loan that fits is the one where your budget survives the scenario, not just the opening number.
Go a little deeper
Frequently asked
Questions buyers often follow up on
How often does an adjustable rate change after the initial period?
After the initial fixed period, most ARMs adjust once a year on a schedule the lender can show you. Each adjustment is based on a published index plus the lender's margin, and the loan's caps limit how much the rate and payment can increase at a single adjustment and over the life of the loan.
What is an index and a margin on an ARM?
The ARM's rate is built from two parts: the index, a published market rate the lender does not control, and the margin, the lender's fixed markup. When the index moves, your rate moves by the same amount up to the caps, which is why it is worth asking which index the loan uses and what the margin and caps actually are.
Can I refinance an adjustable loan later?
Refinancing is generally available when you meet the lender's qualifications, rate, and equity requirements, and many ARM borrowers refinance into a fixed loan before the first adjustment. The option can change with your situation and the market, so treat it as a plan, not a guarantee.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: pick the loan structure to match your real timeline, not the rate on a banner. If you plan to stay long, predictability usually wins, and if your plan has an end date, we price the adjustable structure across that window, caps included, so you decide with the full picture.
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