What Is the Difference Between Fixed-Rate and Adjustable-Rate Mortgages?

The variability of the interest rate over time is the key difference between a fixed-rate and an adjustable-rate mortgage. In a fixed-rate mortgage, the interest rate is set from the first day of the mortgage loan, and will not change from that point. In contrast, in an adjustable-rate mortgage, the interest rate is set initially and thereafter may increase or decrease periodically.

While fixed-rate mortgages charge a fixed interest rate, the principal and interest payments required of a borrower may vary from month to month. Regardless of this variation, the total interest charged on the principal stays the same, making it easier for homeowners to set a budget for repayment.

In contrast, the interest rate on an adjustable-rate mortgage is variable. An adjustable-rate mortgage will most likely initially begin with a lower rate than the market rate for a comparable fixed-rate loan. However, the interest rate will eventually shift over time and tends to increase. However, most loans will include a cap on the amount to which the interest rate could rise, or fall. Despite this cap, if the adjustable-rate mortgage is held for a long enough period of time, the interest rate for that adjustable-rate mortgage will eventually tend to exceed the rate for fixed-rate loans.