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Fixed-Rate Mortgage vs. ARM: How Do They Compare?

For most people shopping for a home, price is just the starting point. How much a bank is willing to lend—and under what conditions—also plays a role in determining what they can afford. That’s why it’s important to think strategically, particularly with rates near historically low levels.

Let’s look at how two different types of mortgages—fixed-rate and adjustable-rate—can serve different types of borrowers, and how their relative advantages can change depending on prevailing interest rates.

Fixed-rate mortgages

A fixed-rate mortgage locks in both your interest rate and monthly payments for the life of your loan, offering the peace of mind that comes with stability. This is the most traditional form of mortgage. Other reasons to consider a fixed-rate mortgage include:

  • Predictable budgeting: Your repayment obligations will be clear.
  • Interest rate stability: Your payment will hold steady, even if interest rates rise.
  • Flexible terms: Most borrowers opt for a 30-year mortgage, but shorter terms, such as 15 or 20 years, may be a better fit for your goals.

Fixed-rate mortgages can be appealing if you think rates are lower now than they will be in the future. With rates near historical lows, locking in today’s rates for the long term could make sense for many borrowers.

Adjustable-rate mortgages

An adjustable-rate mortgage (ARM) is generally a hybrid, with a fixed interest rate for a specified initial term—say, five years—after which the interest rate may reset, or fluctuate, typically depending on prevailing interest rates. A 5/1 ARM, for example, offers a five-year fixed rate of interest, after which the rate can reset annually.

ARMs typically offer lower initial monthly payments. As a result, an ARM may make sense if you would like greater cash-flow flexibility in the near term and/or think rates might decrease in the future. Other reasons to consider an ARM include:

  • Lower initial rate: The interest rate during the initial fixed period is generally lower than that of a fixed-rate mortgage, which can save you money over the short term.
  • Interest rate caps: To protect against rising interest rates, many ARMs offer limits on how much your rate can increase during any given reset period and over the life of the loan. You should nevertheless budget for the maximum interest rate your loan allows once your fixed rate period ends.
  • Interest-only options: Some ARMs offer an interest-only payment option to lower your initial monthly payments even further. However, it is important to remember that during the interest-only period, your payments will not reduce your loan principal unless you choose to pay more than the minimum billed amount.1

Although ARMs can offer attractive initial payments, be certain to budget for potentially higher rates once the initial fixed-rate period ends. Don’t assume that you can refinance or sell your home before rates change. And whether you choose a fixed-rate mortgage or an ARM, don’t be enticed into borrowing more than you can afford.

    1Interest-only mortgages have an initial interest-only payment period followed by a fully amortizing payment period that includes both principal and interest.

    What you can do next

    Are you looking to purchase a new home, investment or vacation property? Schwab Bank and Quicken Loans® can help you find a loan that makes sense for you.

    • Find out more about Schwab Bank’s home lending program provided by Quicken Loans.
    • You may be eligible for home lending discounts based on your qualifying assets with Schwab. To learn more check out today’s mortgage rates and discounts.
    • Call 877-518-5227 for more information.  
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    Important Disclosures

    This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Please consult with your tax advisor on the deductibility of home equity line of credit interest payments for your specific tax situation.

    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

    All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers are obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.

    Charles Schwab Bank and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. Charles Schwab & Co., Inc. does not solicit, offer, endorse, negotiate or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken Loans, Inc. Quicken Loans Inc., is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc. or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab Bank, Member FDIC and Equal Housing Lender.

    Quicken Loans is licensed in all 50 states. Quicken Loans Inc.; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. AL License No. MC 20979, Control No. 100152352. AR, TX: 1050 Woodward Ave., Detroit, MI 48226-1906, (888) 474-0404; AZ: 1 N. Central Ave., Ste. 2000, Phoenix, AZ 85004, Mortgage Banker License #BK-0902939; CA: Licensed by Dept. of Business Oversight, under the CA Residential Mortgage Lending Act and Finance Lenders Law; CO: Regulated by the Division of Real Estate; GA: Residential Mortgage Licensee #11704; IL: Residential Mortgage Licensee #4127 – Dept. of Financial and Professional Regulation; KS: Licensed Mortgage Company MC.0025309; MA: Mortgage Lender License #ML 3030; ME: Supervised Lender License; MN: Not an offer for a rate lock agreement; MS: Licensed by the MS Dept. of Banking and Consumer Finance; NH: Licensed by the NH Banking Dept., #6743MB; NV: License #626; NJ: New Jersey – Quicken Loans Inc., 1050 Woodward Ave., Detroit, MI 48226, (888) 474-0404, Licensed by the N.J. Department of Banking and Insurance.; NY: Licensed Mortgage Banker – NYS Banking Dept.; OH: MB 850076; OR: License #ML-1387; PA: Licensed by the Dept. of Banking – License #21430; RI: Licensed Lender; WA: Consumer Loan Company License CL-3030. Conditions may apply.

    Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license.

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