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

A fixed-rate mortgage keeps the same interest rate for the life of the loan, so your principal and interest payment never changes. An adjustable-rate mortgage (ARM) usually starts with a lower rate for a set period, often 5, 7, or 10 years, then resets on a schedule based on a market index, within limits called caps. For the week ending October 16, 2026, the Mortgage Bankers Association reported an average of 7.41% on a 30-year fixed loan and 6.46% on a 5/1 ARM. An ARM usually costs less if you sell or refinance before the fixed period ends, but plans change and a refinance depends on rates, your income, and your home's value at the time, so take one only if you could also afford the payment at the loan's maximum rate.

How does a fixed-rate mortgage work?

You lock one rate at closing and keep it until you sell, refinance, or pay off the loan. On a 30-year loan of $400,000 at 7.41%, the principal and interest payment is $2,772.25 in month 1 and in month 360. Freddie Mac's weekly survey put the 30-year fixed average at 7.32% for October 22, 2026. Common terms are 30 and 15 years. A 15-year loan has a lower rate (6.73% in the same MBA survey) and a much higher payment; see 15-year versus 30-year mortgages.

Your total monthly payment can still change on a fixed-rate loan. If you pay property taxes and homeowners insurance through an escrow account, the escrow portion rises or falls when those bills change.

How does an adjustable-rate mortgage work?

An ARM has four parts that decide your future payments:

• Initial period. The starting rate is fixed for a set time. In a 5/1 ARM, the first number is the years at the starting rate and the second is how often it adjusts afterward, here once a year.
• Index. A published market rate that moves over time. For loans sold to Fannie Mae, the index is SOFR (the Secured Overnight Financing Rate) averaged over 30 days, as published by the New York Fed.
• Margin. A fixed number of percentage points the lender adds to the index. At each adjustment, your new rate is the index plus the margin, limited by the caps.
• Caps. Limits on how much the rate can rise at the first change, at each later change, and over the life of the loan. Caps of 2/1/5, for example, mean up to 2 points at the first change, 1 point at each later change, and 5 points above the starting rate in total.

Your Loan Estimate shows how high an ARM's rate and payment can go, in the Projected Payments table on page 1 and in extra tables on page 2. Before the first adjustment, your servicer must send you a notice at least seven months before the first payment at the new rate, with an estimate of the new payment. For a deeper look at ARM trade-offs, see the advantages and disadvantages of an ARM.

What are the advantages of a fixed-rate mortgage?

• Your payment does not rise with market rates. In the worst-case example below, the ARM's payment climbs from $2,517.76 to about $3,757 by year 9, while the fixed payment stays $2,772.25.
• Comparing offers is simpler. Two fixed-rate quotes can be compared on rate, points, and fees. An ARM quote also needs the index, margin, caps, and adjustment schedule to judge its true cost.
• It can be easier to qualify for than a short ARM. For an ARM with a 5-year initial period, Fannie Mae requires the lender to qualify you at the higher of the starting rate plus the first-change cap or the fully indexed rate (index plus margin). With a 6.46% start and a 2-point cap, that is 8.46%, or a qualifying payment of $3,064.32 on $400,000, higher than the $2,772.25 fixed payment. ARMs with initial periods longer than 5 years can generally qualify at the starting rate.

What are the disadvantages of a fixed-rate mortgage?

• You usually pay a higher starting rate. At the October 2026 averages, the fixed loan costs about 0.95 percentage points more than a 5/1 ARM, or $254.49 more a month on $400,000.
• Falling rates do not help you automatically. If market rates drop, an ARM's rate can fall at its next adjustment. With a fixed rate, you have to refinance to get a lower rate, which means a new application, new underwriting, and new closing costs.
• You may pay for protection you never use. If you sell in 4 years, a 5-year ARM's rate would not have changed before you sold, so the higher fixed rate bought you nothing.

How long do you need to keep the loan for a fixed rate to pay off?

The decision comes down to one estimate: how long you expect to keep this loan before you sell or refinance. Here is a worked example using the MBA averages for the week ending October 16, 2026, on a $400,000, 30-year loan. The ARM averaged 1.11 points (1.11% of the loan paid at closing) versus 0.75 for the fixed loan, so the ARM costs $1,440 more upfront. The example assumes a 5/1 ARM with 2/1/5 caps.

The ARM's $17,688 lead after 5 years is $15,269 in lower payments, plus $3,859 more principal paid off, minus the $1,440 in extra points. What happens next depends on the rate:

1. Rates fall or stay near today's level. If the ARM resets to 7.41% or lower, it stays ahead for as long as you keep it.
2. The rate rises 2 points and stays there. At 8.46%, the payment becomes about $3,004 from year 6. The ARM's lead runs out after about 118 months, just under 10 years.
3. The rate rises the maximum every year. The rate goes to 8.46% in year 6, 9.46% in year 7, and so on up to 11.46%. The payment is about $3,004 in year 6 and $3,254 in year 7, and the ARM falls behind the fixed loan after about 92 months, just under 8 years.

How to use this test with your own quotes:

1. Get a fixed quote and an ARM quote from the same lender on the same day, with points.
2. Multiply the monthly payment difference by the number of months you expect to keep the loan, up to the end of the initial period, then subtract any extra points on the ARM. Compare the lender fees and credits on the two Loan Estimates too, since a difference there changes the result the same way points do. In the example, leaving after 1 year saves about $1,614, after 3 years about $7,722, and after 5 years about $13,829, plus the ARM's slightly lower loan balance.
3. Use the ARM's caps from the Loan Estimate to work out the payment at the lifetime maximum rate, which is $3,757 a month in the example. If you could not afford that payment on your current income, the fixed loan is the safer choice.
4. If you might keep the loan past the initial period, run the comparison month by month after the reset, counting both the payment difference and the change in each loan's remaining balance, as the scenarios above do. A mortgage calculator or your lender can produce the two payment schedules.

How lenders build each rate, including the role of your credit score and points, is covered in how mortgage interest rates are calculated. For conventional loan rules that apply to both rate types, see the requirements of a Fannie Mae or Freddie Mac loan.