To understand fixed and adjustable rates for mortgage loans, consider the following information:

Loan-Rates​

1. Fixed Rate

2. Adjustable Rate

This choice affects

• Whether your interest rate can change

• Whether your monthly principal and interest payment can change and its amount

• How much interest you will pay over the life of the loan

Fixed Rate Loans

• Lower risk, no surprises

• Higher interest rate

• Rate does not change

• Monthly payments stay the same

• 2008–2014: Chosen by 85-90% of buyers

​

Adjustable Rate Loans

• Higher risk, uncertainty

• Lower interest rate to start

• After initial fixed period, rate can increase or decrease based on the market

• Monthly payments can increase or decrease over time

• Historically: Chosen by 70-75% of buyers

• Historically: Chosen by 25-30% of buyers

​Understanding Adjustable-Rate Mortgages (ARMs)

• Most ARMs have two periods.

• In the first period, your interest rate is fixed and won’t change.

• During the second period, your rate goes up and down regularly based on market changes.

Here's how an example ARM would work, i.e. - 5 / 1 Adjustable-rate mortgage (ARM)Fixed Period:

• This “5” is the initial interest rate and will stay fixed

• Common fixed periods are 3, 5, 7, and 10 years

• The most common adjustment period is “1,” meaning you will get a new rate and new payment amount every year once the fixed period ends. Other, less common adjustment periods include "3" (once every 3 years) and "5" (once every 5 years).

• You will be notified in advance of the change.

Adjustable Period

• How often your rate will adjust after the fixed period ends.

​What to know

1. Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term. With a fixed-rate loan, your interest rate and monthly principal and interest payment will stay the same. Your total monthly payment can still change—for example, if your property taxes, homeowner’s insurance, or mortgage insurance might go up or down.

2. Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. You may want to consider this option if, for example, you plan to move again within the initial fixed period of an ARM. In this case, future rate adjustments may not affect you. However, if you end up staying in your house longer than expected, you may end up paying a lot more. In the later years of an ARM, your interest rate changes based on the market, and your monthly principal and interest payment could go up a lot, even double.

3. ARMs include specific rules that dictate how your mortgage works. These rules control how your rate is calculated and how much your rate and payment can adjust. Not all lenders follow the same rules, so ask questions to make sure you understand how these rules work.

4. ARMs marketed to people with lower credit scores tend to be riskier for the borrower.

5. If you have a credit score in the mid-600s or below, you might be offered ARMs that contain risky features like higher rates, rates that adjust more frequently, pre-payment penalties, and loan balances that can increase. Consult with multiple lenders and get a quote for an FHA loan as well. Then, you can compare all your options.