A fixed-rate mortgage keeps the same interest rate for the whole term. An adjustable-rate mortgage (ARM) starts lower, then resets based on market rates. The choice is a bet on how long you will stay in the home.
A 30-year fixed rate never changes. Your payment is predictable forever. The downside is a slightly higher starting rate, because you are paying the lender to take on the interest-rate risk.
A 5/1 ARM is fixed for 5 years, then adjusts every year after. The first five years are cheaper — often 0.5% to 1% below fixed rates. After that, the rate follows an index and can rise sharply, up to a cap.
If you are confident you will move or refinance within the fixed period, an ARM saves real money. If you plan to stay 10+ years, the fixed rate's certainty is worth the premium.
Change the interest rate on our calculator to compare a 6.5% fixed rate against a 5.5% ARM — the difference in monthly payment is immediate.
Reading is step one. Step two is running your own numbers — taxes, insurance, PMI and all.
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