When buying a home or refinancing, one of the most crucial decisions is choosing your mortgage. Fixed-rate and adjustable-rate mortgages have some unique features that can help inform your decision.

Comparison chart

Adjustable Rate Mortgage versus Fixed Rate Mortgage comparison chart
Edit this comparison chartAdjustable Rate MortgageFixed Rate Mortgage
Interest rate Fixed for the first few years, resets periodically thereafter Fixed for the duration of the loan
Interest rate risk The risk of interest rates rising in the market is borne by the borrower. If rates fall, borrower benefits. The risk of interest rates rising is borne by the lender. If interest rates fall, borrower may refinance but usually incurs prepayment fees or other costs associated.
Affordability Monthly payments are lower initially (for the first few years) Monthly payments are higher because interest rate is slightly higher; because the lender bears the interest rate risk and charges the borrower a premium for this risk.

Key differences between fixed rate loans and ARM

Interest Rate

In a fixed rate mortgage, the interest rate the bank charges the borrower remains the same throughout the entire duration of the loan (usually 15 to 30 years). On the other hand, interest rate on an adjustable-rate mortgage (ARM) is reset periodically (usually every year after an initial period of 2,3 or 5 years). A 3/1 ARM means that the interest rate on the loan is fixed for the first 3 years but changes after that once a year until the loan is repaid. Lenders usually aren't allowed to raise interest rates on ARM arbitrarily. When the interest rate on an ARM is reset, it is determined by using a benchmark market rate e.g. LIBOR.

With a long-term fixed-rate mortgage, the lender assumes the interest rate risk i.e. the risk that interest rates will rise in the future. Therefore,


The risk with an ARM is that the rate of interest (and therefore, monthly payments) may rise over the lifetime of the loan. The low interest rates on ARM may not last beyond the initial period. So when interest rates are low, it may be tempting to lock them in with a fixed-rate mortgage.

Correspondingly, the risk with a fixed-rate mortgage is that interest rates may either fall or stay low for an extended duration. While a borrower can usually refinance to take advantage of lower interest rates, sometimes there is a prepayment penalty for closing out the loan; and there is always fees (closing costs, appraisal fee etc.) associated with refinancing.

Pros and Cons

With a fixed rate mortgage loan, you can be certain of the amount you owe the bank on a monthly basis. It remains the same through the entire term of your loan, never stressing you out if there is a fluctuation in the market. A variable rate mortgage on the other hand, gives you the option to pay less interest, if the market conditions are favorable. Also, some lenders usually put a cap to the highest interest rate that can be charged. In this way, you are assured of paying moderate rates. Due to lower monthly payments (at least in the first few years), ARMs are more affordable.

How to choose

Here are some tips to choose which mortgage to take:



The United States of America is one country where fixed rate mortgages are more popular. United Kingdom, Australia and New Zealand are countries where variable rate mortgages are more popular than the fixed rate mortgages.

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"Adjustable Rate Mortgage vs Fixed Rate Mortgage." Diffen.com. Diffen LLC, n.d. Web. 21 Jan 2019. < >