Fixed Rate vs. ARM: How to Choose the Right Mortgage
A fixed-rate mortgage keeps the interest rate the same for the entire loan term. An adjustable-rate mortgage, or ARM, typically starts with a fixed rate for a set period and then adjusts periodically based on the loan terms.
For example, a 30-year fixed mortgage has the same interest rate for all 30 years. A 5/1 ARM might have a fixed rate for the first five years and then adjust annually after that.
The biggest difference is payment certainty versus potential payment flexibility.
What Is a Fixed Rate Mortgage?
A fixed-rate mortgage provides predictable principal and interest payments.
If your mortgage rate is 6.25% today, it stays 6.25% throughout the loan unless you refinance or otherwise change the loan.
This can make a fixed-rate mortgage attractive to buyers who:
Plan to stay in the home for many years
Want predictable monthly payments
Do not want to worry about future interest rate changes
Prefer simplicity and long-term stability
Think of it like locking in the price of gasoline for the next 30 years. You may pay more than the market price at some point, but you also know exactly what your price will be.
Explore our loan programs to see which options fit your situation.
What Is an Adjustable Rate Mortgage?
An ARM generally begins with a fixed interest rate for a predetermined period. After that initial period, the rate can adjust under the mortgage terms.
Common examples include:
• 3/1 ARM
• 5/1 ARM
• 7/1 ARM
• 10/1 ARM
The first number represents the number of years the initial rate is fixed. The second number generally represents how frequently the rate can adjust after the initial fixed period.
For example, with a 7/1 ARM, the initial rate is fixed for seven years. After that, the rate can generally adjust once per year.
The important point is that an ARM doesn’t automatically mean your rate will increase. It means the rate can change according to the loan's terms.
Choosing Between a Fixed Rate and an ARM
There is no universal answer.
Consider a buyer who expects to own a home for 20 years. Payment stability may matter more, since an ARM could expose them to several years of rate adjustments.
Now consider someone who expects to move within five or six years. An ARM with an initial fixed period that covers most or all of that expected ownership period could be worth investigating.
That does not mean the ARM will necessarily be cheaper. It means the buyer's expected time in the home becomes an important part of the decision.
Questions to Ask Before You Choose
Before choosing between a fixed rate and an ARM, ask:
1. How long do I realistically expect to own this home?
2. How much lower is the ARM's initial rate?
3. When can the rate first adjust?
4. How often can it adjust after that?
5. What is the maximum rate allowed?
6. What is the maximum payment increase I could face?
7. What index and margin determine future adjustments?
8. Would I still be comfortable making the payment if the rate increased significantly?
The last question is particularly important.
Do not choose an ARM simply because the initial payment is lower. Understand what could happen to the payment later.
For more detail, read the CFPB's official consumer handbook on ARMs. You can also find answers to common questions in our mortgage FAQ.
The Bottom Line
A fixed-rate mortgage is primarily about predictability.
An adjustable-rate mortgage is about accepting future interest rate uncertainty in exchange for the possibility of a lower initial rate or payment.
The right comparison is not simply, "Which mortgage has the lower rate today?"
It is: "Which mortgage structure makes sense for how long I expect to own the home, and how comfortable am I with future payment changes?"
Our loan officers serve buyers in Sioux Falls, Harrisburg, Tea, Brandon, and throughout Southeast South Dakota. Meet our loan officers to find the right fit, then reach out to talk through both options.