Fixed vs adjustable rate mortgages: Which is right for you?

When it comes to buying a home, there are a lot of decisions you’ll need to make along the way. How much should I put toward the down payment? Do I need to get pre-approved? What mortgage provider should I go with?

One of those many decisions is whether to get a fixed or adjustable rate mortgage. And while we know you’ve got plenty on your plate, this choice is an important one. That’s because it will impact your interest rate, monthly payment, and how much you pay in interest over the life of your loan.

So, what’s the difference between a fixed and adjustable rate mortgage? And which one is better for you? We’ve got those answers and more to help you check off one more decision on your home buying journey.

What is a fixed rate mortgage?

A fixed rate mortgage means your interest rate won’t change for the full term of your loan. You’ll have the same interest rate from the day you close to the day you pay off your loan. The only way that rate changes is if you decide to refinance.

That fixed rate means you’ll have the same monthly principal and interest payment throughout the life of your loan. That’s what makes it a budgeter's dream — a fixed rate mortgage provides a level of consistency and stability that makes it easier to plan out your finances.

You can opt for a fixed rate mortgage when you first buy your home or when you refinance. Keep in mind that your total payment may still fluctuate over the years (thanks to potential changes in property tax and hazard, flood, or required insurance), but your monthly principal and interest payment will remain the same.

What is an adjustable rate mortgage?

An adjustable rate mortgage starts as a fixed rate mortgage for a set amount of time. When that period is up, you’ll get switched over to a variable rate.

With a variable rate, your interest rate will change periodically. Throughout the life of your loan, your rate will go up or down based on something called the index. The index is a rate that’s determined by the market and set by a neutral third-party (your loan paperwork will specify which one exactly).

Your fixed introductory rate will generally last between three and 10 years, depending on your lender’s options and the terms of your loan. After the introductory period ends, your rate will fluctuate based on the index and your monthly principal and interest payments will adjust accordingly. You can choose an adjustable rate mortgage when you first buy your home or when you refinance. The escrow portion of your monthly mortgage payment may also change periodically during the term of your loan. This is dependent on changes to your property taxes and hazard, flood, or other required insurance.

Adjustable rate mortgages can be a bit less straightforward than fixed rate. But that doesn’t mean they aren’t worth looking into! Here are a few common questions about adjustable rate mortgages:

• How often will my rate change? After your initial fixed interest rate period is over, most adjustable rate mortgages will adjust your rate every year on the anniversary of your closing date. Keep in mind that some adjustable rate mortgages change every six months, or even every month.

• Is there a cap to how high my rate can go? Yes! Most loans come with a set maximum that dictates how high your interest rate can get, both during a single adjustment period and during the life of the loan. On the other hand, there may also be a limit on how low your rate can go.

• How is my rate decided? Your interest rate is partially determined by the index, which is a benchmark determined by the market. There are several third-parties (not your lender) that regularly publish the rate. Your loan paperwork will specify which index exactly your rate is tied to.

What’s the difference between fixed and adjustable rate mortgages?

The main difference between fixed and adjustable rate mortgages is whether your interest rate changes during the life of your loan.

A quick recap: A fixed rate mortgage comes with a locked-in rate, so your monthly principal and interest payments won’t change (unless you decide to refinance). An adjustable rate mortgage has a locked-in rate for a pre-determined period, but once this period is over, it will change regularly based on the market (which means your payments will change too).

Here are some key differences to consider when choosing between a fixed and adjustable rate mortgage.

So what exactly does all that look like when it comes to payments? Let’s run the numbers. Say you’re taking out a 30-year mortgage for $400,000 and putting 20% down. At the start, adjustable rate mortgages typically have a lower interest rate. In this example, that initial rate is locked in for five years.