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Fixed- Vs. Adjustable-Rate Mortgage (ARM): What’s The Difference?

February 29, 2024 7-minute read

Author: Victoria Araj


Disclaimer: Rocket Mortgage® does not currently offer 5-year ARMs.

One major decision you’ll have to make when you’re about to buy a home is whether to get a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Let’s look at some of the differences and similarities between the two.

Overview: ARM Vs. Fixed-Rate Mortgages

As you may have guessed, there are a few specific differences between ARMs and fixed-rate mortgages. Here’s a quick overview of each type.


Adjustable-rate mortgages are typically 30-year loans, meaning you’ll pay back the money you borrowed over 30 years, with a rate that is fixed for an initial period. An ARM interest rate changes after the fixed period expires.

At the beginning of your loan, you’ll get an introductory rate that’s typically lower than average fixed-mortgage interest rates. The low rate will stay the same for a certain period of time, with the common types being 7 and 10 years. After the fixed-rate period ends, your interest rate will adjust up or down based on an index, like the London Interbank Offered Rate (LIBOR).

Mortgage lenders use a special series of number structures to tell you about your adjustable rate loan and interest periods. For example, another common type of ARM is a 5/1 loan. The first number tells you how long the fixed interest rate lasts. The second number tells you how often your interest rate can change. In this case, it changes yearly, but if you see a “6” in place of the “1,” then the rate changes every 6 months once the fixed period is over.

Fixed-Rate Mortgages

A fixed-rate mortgage has the same interest rate throughout the life of the loan. Your monthly payment of principal and interest won’t change, though your overall payment can, depending on how your taxes and homeowners insurance fluctuate.

A fixed-rate mortgage loan is the most popular type of financing because it’s the most predictable. However, that predictability, or certainty, of a fixed rate comes with a cost. This cost is what makes ARMs attractive to many people who can save a lot of money with a loan that’s not fixed for the full term of the mortgage.

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What Are The Differences Between Fixed- and Adjustable-Rate Mortgages?

The main difference between a fixed- and an adjustable-rate loan is that the interest rate will never change for a fixed-rate mortgage. On the other hand, an ARM’s interest rate can change multiple times over the loan term. The monthly mortgage payment will change, too, if the index rises and falls.

There are also a few other ways that ARMs and fixed-rate loans are different. Let’s learn more.


Your ARM rate can never fall below a certain margin specified in your loan documentation. For example, if the margin specified is 3%, the margin is added to the current index number on the date your rate adjusts.

Rate Caps

ARM loans have rate caps that limit the amount your interest rate can rise or drop in a single period and over the lifetime of your loan. Your loan might not increase or decrease exactly along with the market if it hits its cap.

An initial cap is the maximum percentage your rate can increase or decrease in a single period after your fixed-rate period expires. A periodic cap limits the maximum amount that an interest rate can change from one adjustment period to the next.

A lifetime cap puts a limit on the total amount that your interest rate can increase or decrease from the introductory rate over the mortgage term. Your lender will express your ARM caps as a series of three numbers separated by forward slashes in this format: initial cap/periodic cap/lifetime cap. This is your “cap structure.”

So, an ARM with a 2/1/5 cap structure means that your loan can increase or fall 2% during your first adjustment and up to 1% with every periodic adjustment after that. Finally, your interest rate can’t increase or decrease more than 5% above or below the initial rate over the entire lifetime of your home loan.

Interest Rates

Interest rates for ARMs are lower than fixed-rate loans, at least for a few years. Lenders usually charge a higher interest rate for fixed-rate loans because they must predict interest changes over time. Because an ARM’s rate changes to fit the market, lenders can be more lenient with initial loan charges and give you a lower mortgage rate to begin with. 

Ease Of Qualification

When you apply for a mortgage, your lender looks at how much income your household brings in a month versus how much you spend each month. This is your debt-to-income (DTI) ratio, and it’s a major factor when you get a loan. If you have a slightly higher DTI ratio, you may have an easier time qualifying for an ARM than a fixed-rate mortgage.

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How Are ARM And Fixed-Rate Mortgages Similar?

Believe it or not, ARMs and fixed-rate mortgages do have a few things in common.

Term Length

Both ARMs and fixed-rate loans offer the same term lengths. A term length is the number of years you’ll spend paying off your loan. For example, ARMs and fixed-rate loans are both available with common 30-year term lengths.

Credit Qualifications

Whether you apply for an ARM or a fixed rate, your lender will look at more than just your income. Your credit score plays a major role in your ability to get any type of mortgage.

Your credit score is the numerical representation of your credit history. It’s a three-digit number that expresses how consistent a borrower is when paying back debts. Most lenders and financial institutions consider “good credit” to be a score of 700 or above. The higher your credit score, the more likely you’ll be able to get either an ARM or a fixed-rate mortgage.

Which Is Better: A Fixed- Or Adjustable-Rate Mortgage?

So, which is better: an ARM or a fixed-rate loan? The short answer: it depends.

Adjustable-Rate Mortgages May Be Good For

  • Paying more on your loan early on: Do you want to spend more time paying on your mortgage principal right out of the gate? ARMs start with lower interest rates than fixed loans. This might give you some flexibility in your budget to make extra payments towards your principal.
  • Living in your current home for a short amount of time: Are you buying a “starter home” that you plan on moving out of sooner rather than later? ARMs allow you to build equity and take advantage of a lower interest rate while saving and searching for your dream home.
  • A high interest rate market: When interest rates are high, it makes sense to choose an ARM. Fixed-rate mortgages use current mortgage rates as a jumping-off point to calculate your rate so that you might lock into a higher-than-average interest rate for the duration of your loan. An ARM changes as the market changes, so when rates go down, your interest rate will, too.
  • Getting close to retirement: If you’re close to retirement and you’re planning on selling soon, ARMs allow you to save more for retirement with lower interest rates. You may never have to see a rate adjustment depending on the terms of your loan and when you want to sell.

Fixed-Rate Mortgages May Be Good For

  • Buying your “forever home”: Are you planning to settle down and live in your current home long-term? Fixed interest rates can give you a better sense of stability with your budget, and you can make extra payments toward principal to pay down your loan at any time.
  • Tight monthly budgets: ARMs have low initial interest rates, but after this period ends, rates can be unpredictable. Fixed-rate loans allow you to predict what you’ll pay in interest and principal each year without factoring in market rates. If a small rate increase means financial stress for your household, you’re better off with a fixed-rate loan.
  • A low interest market: If interest rates are low, you can save thousands of dollars by locking in with a low rate. Even if fixed-rate loans have higher initial rates than ARMs, you’ll benefit from a lower interest rate when rates eventually do increase.

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Adjustable-Rate Mortgage Vs. Fixed-Rate Mortgage FAQs

While comparing a fixed-rate loan to an ARM may seem complicated, it doesn’t have to be. By learning more about each type of financing, you can make the decision-making process simpler. Below are some of the most common questions home buyers have about ARMs and fixed-rate mortgages. 

What are the differences between fixed- and adjustable-rate mortgages?

With fixed-rate mortgages, your interest rate will never change. With adjustable-rate mortgages, your interest rate will change over time based on market conditions for the life of your loan. That doesn’t mean your interest rate will change indefinitely. Lenders place caps on the number of times your interest rate can change and on the amount that your rate can rise or fall over the life of your loan.

How are ARM and fixed-rate mortgages similar?

Both ARMs and fixed-rate mortgages have similar term length options and qualification requirements. Lenders will look at your credit score and your personal financial situation to determine the length of your loan’s term, your interest rate and your loan amount whether you’re applying for a fixed-rate or an adjustable-rate mortgage.

Why would you choose an adjustable-rate over a fixed-rate mortgage?

Adjustable-rate mortgages may be the better option over fixed-rate mortgages for borrowers who expect to move out before the fixed-rate period of their ARM ends. ARMs are also often good in housing markets where interest rates are high, as your interest rate can adjust if rates drop. This is especially true for more expensive homes. The more expensive the home, the more the homeowner will save during the lower initial fixed-rate period. The difference can be in the 10s of thousands of dollars less in interest paid for ARMs compared to fixed-rate mortgages during the initial period of an ARM.

Is a fixed-rate mortgage or adjustable-rate mortgage riskier?

Because the amount you’ll pay in interest fluctuates with the market, ARMs present more of a risk for borrowers than fixed-rate loans.

Is an ARM or fixed-rate mortgage easier to qualify for?

Typically, ARMs may be easier to qualify for than fixed-rate mortgages. However, ARMs and fixed-rate home loans tend to have the same or similar credit requirements.

The Bottom Line

There are two major types of interest schedules you can choose when you buy a home: fixed and adjustable. Fixed-rate mortgages keep the same interest rate throughout the term of the loan. Adjustable-rate mortgages (ARM) start with a lower rate, then change as market interest rates change. ARMs have interest rate caps that limit how much your rates can increase or decrease initially, each subsequent adjustment period and in total over the lifetime of your loan.

ARMs are easier to qualify for than fixed-rate loans, but you can get 30-year loan terms for both. An ARM might be better for you if you plan on staying in your home for a short period of time, interest rates are high or you want to use the savings in interest rate to pay down the principal on your loan. On the other hand, a fixed-rate loan might be better for you if you’re on a tight household budget and you plan to live in your current home for a long time.

To find what type of loan you can qualify for, use our online application to start your home buying journey, or talk to a loan expert who can help you decide on what type of financing you should use.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.