There are many factors to consider when choosing between a fixed- and adjustable-rate mortgage (ARM). This article outlines the pros and cons of each so you can make the best decision for you before purchasing a home.

Buying a house is a big decision—and so is choosing which type of mortgage you’ll use to make the purchase. There are many factors to consider when choosing between a fixed- and adjustable-rate mortgage. This article outlines the pros and cons of each so you can make the best decision for you before purchasing a home.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage has the same interest rate for the duration of the loan. This results in a predictable monthly mortgage payment, though the amount of your payment applied to principal vs. interest paid varies. Having a fixed interest rate makes it easier to budget for your monthly payment and assess your mortgage-to-income ratio.

Common fixed-rate mortgages include 30-year, 20-year and 15-year amortization terms.

How to Calculate Fixed-Rate Mortgage

To calculate your fixed-rate mortgage, you need three things: the loan amount, the loan term and the interest rate. Once you have these, it’s pretty simple to calculate your monthly payment and determine the affordability of a new home loan. Use our mortgage calculator to estimate your monthly mortgage payment and the total amount of interest you’ll pay over the lifetime of the loan. Homeowner’s insurance, property taxes and, for some, mortgage insurance (MI) should also be considered as part of your monthly mortgage payment. MI is typically required for conventional and FHA loans if your down payment is less than 20% of your home’s selling price, according to the Consumer Financial Protection Bureau (CFPB), a government agency that regulates financial products and services offered to consumers.

Fixed-Rate Mortgage Pros and Cons

Benefits of Fixed-Rate Mortgage:

• Straightforward

  Fixed-rate mortgages are fairly simple to understand and won’t change over the course of the loan.

• Predictable payments

  With a fixed-rate mortgage, you know what your monthly principal and interest payments will be and can budget accordingly.

• Less risky

  Locking down an interest rate protects you from potentially higher rate fluctuations in the future.

Disadvantages of Fixed-Rate Mortgage:

• Initially higher interest rate and payments

  It’s possible that you could get a lower interest rate for the initial period of an adjustable-rate mortgage than you could for a fixed-rate mortgage. Because of this, you may have higher payments for some years with a fixed-rate mortgage than you would with an adjustable-rate mortgage.

• Could take longer to pay off interest

  Depending on the term length of your fixed-rate mortgage, it might take you longer to pay off your loan and its interest. For example, while a 30-year mortgage offers lower monthly payments than a 15-year mortgage, you’ll pay more interest over time.

What is an ARM Loan?

With an adjustable-rate mortgage, the interest rate changes throughout the loan’s lifetime. Initially, the loan has a set interest rate for a specified number of years—lower than that of a fixed-rate mortgage. After the initial fixed-rate period, however, the interest rate is subject to adjustment. After the fixed-rate period has ended, ARM rates fluctuate throughout the loan’s remaining lifetime. An advantage of an adjustable-rate mortgage is that you can lock in a lower interest rate for the upfront fixed period.

Common types of adjustable-rate mortgages include 10/6, 7/6 and 5/6 ARMs.

Important ARM Loan Definitions

When comparing fixed vs. adjustable-rate mortgages, an ARM isn’t as straightforward. Since the interest rate fluctuates, these loans are more complex. Below are some important ARM terms to help you understand how this type of mortgage works.

• Adjustment period

  This specifies the period between interest rate adjustments. Adjustments commonly occur every six months.

• Index

  An index is the base interest rate that reflects current economic trends. The U.S. prime rate and SOFR (Secured Overnight Financing Rate) are common indexes, the CFPB reports in its “Consumer Handbook on Adjustable-Rate Mortgages.” ARM adjustments are made based on the index.

• Margin

  The margin is the percentage your lender adds to the index to calculate your mortgage interest rate after your initial rate ends. While the index rate can change, the margin cannot; it’s set in your initial loan agreement.

• Adjustment cap

  An adjustment cap sets a limit on how much your interest rate can increase or decrease each adjustment period.

• Ceiling

  Sometimes referred to as a lifetime cap, the ceiling is the maximum interest rate permitted during an ARM’s lifetime. For example, an 8% ceiling specifies that, for the duration of the ARM, the interest rate will not exceed 8%.

How to calculate an adjustable-rate mortgage is a little more complicated than calculating a fixed-rate mortgage because of the changing rates. However, once your initial interest rate expires, your new ARM interest rate is the sum of the current index plus the margin set by your lender.

Adjustable-Rate Mortgage Pros and Cons

Benefits of ARM Mortgage:

• Lower initial interest rate

  Typically, the initial interest rate is lower than the fixed rates offered at the time.

• Lower initial payments

  Since the initial interest rate is lower than that of a fixed-rate mortgage, so are your monthly mortgage payments.

• Could benefit from lower interest rates down the road

  When your fixed rate expires, the adjusted rate could be lower than when you purchased your loan.

Disadvantages of ARM Mortgage:

• Unpredictable payments

  After your fixed-rate period ends, your monthly mortgage payment will typically vary every six months, making it more difficult to plan your finances.

• Potentially higher interest rate and payments after the fixed-rate period

  The main downside of an ARM is that when your rate is adjusted, the adjusted rate could be higher than when you purchased the loan. This would result in higher monthly payments.

• Higher overall risk

  In general, adjustable-rate mortgages are more risky than fixed-rate mortgages. While you could benefit from falling interest rates, it’s possible that interest rates rise, and you’re unprepared to pay the higher monthly payment.

Which Type of Mortgage Loan is Right for You?

Choosing between a fixed- and adjustable-rate mortgage depends on your financial situation and risk tolerance.

When to Consider a Fixed-Rate Mortgage

• You plan to live in your home for a long time.

• You want—or need—predictable monthly payments for the duration of your mortgage.

• You want to secure the current interest rate or believe future rates will rise.

For a majority of people, a fixed-rate mortgage is the best option. The fixed rate provides predictability for your budgeting purposes, which is particularly helpful if you plan to live in your home for a long time. It’s also the safer option. Data from the mortgage loan company Freddie Mac shows that the annual average rate for 30-year fixed-rate mortgages has trended downward since the 1980s.

The highest average rate was 16.63% in 1981; the lowest was 3.11% in 2020. In January 2025, the average rate was 6.93%.

Below is a breakdown of the average annual interest rate for 30-year fixed-rate mortgages by decade, based on Freddie Mac’s data:

• 1980s: 12.7%
• 1990s: 8.1%
• 2000s: 6.3%
• 2010s: 4.1%
• 2020s: 5.6%

When to Consider an Adjustable-Rate Mortgage

• You plan to live in your home for a short amount of time.

• You have the financial resources to sustain higher monthly payments, if necessary.

• You believe interest rates will significantly decline in the coming years.

For some homebuyers, an adjustable-rate mortgage is a good option. For example, if you plan to move within five to ten years, it might make sense to seek out 10/6, 7/6 or 5/6 ARM with an initial, low interest rate. If you move before the adjustable rates kick in, an ARM could save you money. The same is true if interest rates decrease significantly once your fixed-rate period ends. However, these can be risky "ifs."

When considering a fixed vs. adjustable-rate mortgage, take into account the risk and unpredictable nature of an ARM. If you decide the potential benefits outweigh the risks, make sure you have the financial resources to cover higher monthly payments after the fixed-rate period ends—especially in case the index rate notably increases. Study the terms of your ARM loan agreement too; know the adjustment period, index, margin, cap and ceiling.

Summary of When to Consider a Fixed- vs. Adjustable-Rate Mortgage

Fixed-rate: 

• You plan to live in your home for a long time. 
• You want—or need—predictable monthly payments for the duration of your mortgage. 
• You want to secure the current interest rate or believe future interest rates will rise. 

Adjustable-rate: 

• You plan to live in your home for a short amount of time. 
• You have the financial resources to sustain higher monthly payments, if necessary. 
• You believe interest rates will significantly decline in the coming years. 

Connect with a Mortgage Professional

Which type of mortgage seems like the right option for you? Our mortgage loan officers are happy to help you choose the mortgage that best aligns with your financial needs and plans. Contact us today to learn about the different types of mortgages offered at Cadence Bank.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.