Money guide · Mortgages and home-buying costs
Fixed-rate vs. adjustable mortgage: compare payment risk
Understand fixed and adjustable mortgage rates, ARM indexes and margins, reset schedules, caps, and full housing costs.
How it works
An ARM may begin with a fixed-rate period, then adjust using an index plus a margin within applicable caps and floors. Reset timing and limits differ. A fixed note rate makes principal-and-interest planning more predictable, but taxes, insurance, association dues, and other ownership costs can still change.
A worked example
Imagine an ARM reset uses a 4.5% index plus a 2.5% margin. The uncapped calculation is 7%, but the actual rate depends on the contract’s caps and other terms. If the index later differs, the result differs. An initial 5% quoted rate does not mean the mortgage will stay at 5% through every future adjustment.
What to compare
Read the initial fixed period, first adjustment, later adjustment frequency, index, margin, caps, floor, and maximum possible payment. Compare realistic holding periods and a scenario where you cannot refinance before a reset. Request disclosures showing how payments can change. Include full housing costs when assessing how much variability your household can absorb.
A common mistake to avoid
Do not assume an ARM is manageable merely because you intend to sell before adjustment. Plans can change and sale timing may be uncertain. Nor should you describe a fixed-rate loan as a fixed total housing bill. Both products need a cash-flow assessment and careful review of the actual offer.
Can a fixed-rate mortgage’s total payment change?
Yes. Principal and interest generally remain fixed on a standard fixed-rate loan, while escrowed taxes or insurance and other housing costs can change.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or compare dollars across years using your own assumptions.