SFN Blog

Pros and Cons of Fixed vs. Adjustable-Rate Mortgages

Choosing the right mortgage matters because the interest rate you pick can change your monthly payment by hundreds of dollars. The average 30-year fixed mortgage rate has been around the mid-6% range lately (Freddie Mac reports weekly averages; for example, 6.63% on Aug 7, 2025). Most active mortgages are fixed-rate. A Federal Reserve Bank of St. Louis write-up notes roughly 92% of mortgages are fixed, with about 8% adjustable.

Adjustable-rate lending has ticked up among new loans and applications in recent years, but it is still a small share of the total mortgage market. Industry data shows ARMs made up a modest share of originations and active loans; for example, ICE reported ARMs were about 4.3% of originations by count in April, and that about 5.4% of first-lien mortgages were ARMs as of March 2024. 

Those three points cover the big picture: fixed rates are common and stable; ARMs are smaller but have risen a bit among new buyers. Below, we’ll explain the two types in plain terms, list pros and cons, show how to pick one based on real situations, and give simple tips for shopping.

What Each Mortgage Type Means?

Check the definitions of common types of mortgages:

Fixed-rate mortgage — simple and steady

A fixed-rate mortgage keeps the same interest rate for the whole loan. If you get a 30-year fixed loan at 6%, your rate stays 6% for 30 years. Your monthly principal and interest (P&I) payment stays the same. People like this for steady budgeting.

Typical terms: 10, 15, 20, or 30 years. The longer the term, the lower the monthly payment, but the more interest you pay overall.

Adjustable-rate mortgage (ARM) — lower start, rate can change

An ARM starts with a set rate for a period (for example, 5 years). After that, the rate can change at set intervals based on an index (like the Treasury or LIBOR replacement) plus a margin. Common labels: 5/1 ARM (fixed 5 years, then adjusts each year), 7/1 ARM, 10/1 ARM.

So an ARM often gives a lower rate at first. But after the initial period, your rate — and therefore your payment — can go up or down.

Pros and Cons of Fixed-Rate Mortgages

Here are the main advantages and disadvantages of mortgages with fixed rates:

Pros (why people pick fixed)

  • Predictable monthly payment. You always know what the P&I will be. That makes budgeting easy.
  • Rate stability. You lock in one rate for the whole loan. If rates climb, you’re protected.
  • Peace of mind. No surprises. Good if you prefer low risk.

Cons (the tradeoffs)

  • Higher starting rate. Fixed rates usually start higher than the initial rate on ARMs.
  • Less benefit if rates fall. If market rates drop, your rate stays the same unless you refinance (which costs time and fees).
  • Possibly more interest over time. If you pick a long-term (like 30 years) loan, you may pay more interest than with a shorter loan.

Ups and Downs of Adjustable-Rate Mortgages (ARMs)

Consider these factors of mortgages with adjustable rates:

Ups (why buyers choose ARMs)

  • Lower initial rate and payment. ARMs often start at a lower interest rate. That reduces the payment early on.
  • Good if you move or sell soon. If you plan to stay 3–7 years, an ARM can save money before the rate adjusts.
  • Can qualify for a bigger loan. Lower initial payments may help you qualify for a larger amount.

Downs (the risks)

  • Rate resets can raise payments. After the fixed period, your rate may rise — sometimes a lot. That raises your monthly cost.
  • More complex. ARMs have terms, caps, indices, and margins to track. It’s easy to miss an important detail.
  • Harder to budget long-term. Uncertainty makes financial planning tougher.

A recent industry review shows most ARMs today still have long initial fixed periods (5, 7, or 10 years), and many active ARMs remain in that fixed phase for several years. That lowers short-term risk, but resets do happen, and some borrowers have seen sharp payment changes. 

Key Terms You Should Know (Quick List)

  • Principal: The loan amount.
  • Interest: The cost of borrowing, shown as a percent.
  • P&I: Principal plus interest — the core monthly loan payment.
  • Term: Years to repay the loan (e.g., 30 years).
  • Index: The market number ARMs use to reset (e.g., Treasury yield).
  • Margin: What the lender adds to the index to set your new rate.
  • Caps: Limits on how much the rate or payment can change each period or over the life of the loan.

6 Questions to Answer Before Deciding

Borrowing a mortgage is not an easy process. Answer these questions before you get such a long-term loan:

  1. How long will you stay in the home? Less than the ARM’s fixed period? ARM can save money. Planning to stay many years? A fixed rate is usually safer.
  2. How stable is your income? Tight, fixed income → fixed rate gives protection. Growing or flexible income → you might tolerate ARM swings.
  3. How do you feel about risk? If rate jumps would cause stress, choose fixed. If you can handle some ups and downs, ARM could be fine.
  4. What are the current rates and forecasts? When fixed rates are high vs. ARM start rates, ARMs can look attractive.
  5. Can you refinance if rates fall? Refinancing costs money. If you can refinance later, a fixed loan might be less attractive now. Loan features and caps matter.

Real Example Scenarios

These are situations when mortgages are suitable:

Scenario A — Short stay (3–5 years)

You plan to sell in 4 years. A 5/1 ARM offers a lower rate for the first five years. You pay less monthly while you live there. If you do sell or refinance before the 6th year, you avoid any rate reset. An ARM often makes sense here.

Scenario B — Stay long (15+ years)

You want to live in the house for a long time. You value steady payments. A 30-year fixed locks the rate and keeps your monthly P&I the same. That makes budgeting easy and reduces the chance you’ll be surprised by rising payments.

Scenario C — Tight budget, but expect income growth

You can’t afford a high fixed payment now, but expect a raise in a few years. An ARM can give breathing room early. But plan for the future payment and have a plan to handle increases.

Shopping Tips on How to Get the Best Deal

Do this and you’ll get a mortgage that perfectly suits your situation:

  • Compare lenders. Get at least three quotes. Small differences in rate or fees add up.
  • Check APR and closing costs. APR includes some fees and helps compare loans.
  • Ask about prepayment penalties. Avoid loans that charge big fees if you pay off early.
  • For ARMs, ask for full reset examples. Get a “worst-case” payment estimate after resets.
  • Think total cost, not just monthly. A low monthly payment might cost more over time.
  • Lock rate when you’re ready. If rates look favorable, locking stops them from rising before closing.

What to Watch for with ARMs (Red Flags)

You wouldn’t notice them, but these factors are crucial:

  • Very low introductory rate but vague reset terms.
  • Wide margins (index + margin becomes high).
  • Weak caps (big allowed jumps at reset).
  • No clear examples of payments after a reset.
  • If a lender can’t give clear numbers for future payments, walk away or get a second opinion.

When to Consider Refinancing

Refinance if:

  • Market rates fall enough to lower your payment meaningfully after costs.
  • Your credit or home value improved, giving access to a better rate.
  • You need to change the loan type (switch ARM to fixed) to reduce risk.

Remember: refinancing has fees. The break-even time is how long it takes for the savings to cover those costs.

Final Thoughts

Fixed mortgages give peace of mind and steady payments. ARMs can save money early and work well if you move or sell before the rate resets. There’s no one right choice for everyone. Pick the loan that matches how long you’ll stay, how steady your income is, and how much risk you can handle.