Fixed vs Adjustable Rate Mortgage: Which Is Better in 2026?

Choosing between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM) can mean tens of thousands of dollars in savings—or costs—over the life of your loan. This comprehensive comparison shows you exactly when each type makes sense and how to decide which is right for your situation.

Fixed-Rate Mortgage (FRM)

What It Is

Fixed-rate mortgage: Interest rate stays the same for the entire loan term.

Key features:

• Same payment every month
• Predictable long-term costs
• Protection from rate increases
• Most common mortgage type

How It Works

$300,000 loan, 7% fixed, 30 years:

• Monthly payment: $1,996
• Payment year 1: $1,996
• Payment year 15: $1,996
• Payment year 30: $1,996
• Total interest: $418,527

Never changes regardless of:

• Federal Reserve actions
• Economic conditions
• Inflation rates
• Market interest rates

Available Terms

Term	Typical Rate (2026)	Monthly Payment*	Total Interest*
10-year	6.25%	$3,387	$106,440
15-year	6.50%	$2,613	$170,340
20-year	6.75%	$2,278	$246,720
30-year	7.00%	$1,996	$418,527

*Based on $300,000 loan

Pros of Fixed-Rate Mortgages

✅ Payment predictability

• Budget with certainty
• No payment shock
• Long-term planning easier

✅ Protection from rate increases

• Locked in forever
• Safe from market volatility
• Hedge against inflation

✅ Simpler to understand

• No complex terms
• Easy to explain
• Straightforward comparison

✅ Long-term stability

• Perfect for 7+ year ownership
• Retirement planning friendly
• No refinancing needed

Cons of Fixed-Rate Mortgages

❌ Higher initial rate

• Typically 0.5-1% higher than ARM start rate
• Higher monthly payment initially
• More expensive short-term

❌ Less flexibility

• Locked into one rate
• Must refinance to get lower rate
• Costs $2,000-$5,000 to refinance

❌ May pay for protection you don't use

• If rates fall, you're stuck
• If you move early, paid premium unnecessarily
• Overprotection if rates stay stable

Adjustable-Rate Mortgage (ARM)

What It Is

Adjustable-rate mortgage: Interest rate changes periodically based on market conditions.

Key features:

• Lower initial rate
• Rate adjusts after fixed period
• Payment changes with rate
• More complex structure

How It Works

Common ARM: 5/1 ARM

• 5 = Years with fixed rate
• 1 = Rate adjusts every 1 year after

$300,000 loan, 5/1 ARM:

• Initial rate: 6.25%
• Years 1-5: $1,847/month (fixed)
• Year 6+: Adjusts annually based on index + margin

ARM Terminology

Index:

• SOFR (Secured Overnight Financing Rate) - most common
• Treasury rates
• LIBOR (being phased out)

Margin:

• Lender's markup (typically 2-3%)
• Added to index to get your rate
• Fixed for life of loan

Your rate = Index + Margin

Example:

• SOFR index: 4.5%
• Lender margin: 2.5%
• Your rate: 7.0%

ARM Caps Explained

Initial cap:

• Maximum rate increase at first adjustment
• Typically 2% or 5%

Periodic cap:

• Maximum rate change per adjustment period
• Usually 2% per adjustment

Lifetime cap:

• Maximum rate over life of loan
• Typically 5-6% above start rate

Example: 6/2/5 cap structure

• Start rate: 6%
• First adjustment max: 11% (6% initial cap)
• Each adjustment max: +2%
• Lifetime max: 11% (6% + 5%)

Common ARM Types

5/1 ARM:

• 5 years fixed, then annual adjustments
• Most popular ARM
• Good for 5-7 year ownership

7/1 ARM:

• 7 years fixed, then annual adjustments
• More stability than 5/1
• Better for 7-10 year ownership

10/1 ARM:

• 10 years fixed, then annual adjustments
• Similar to fixed-rate initially
• Rare but available

5/5 ARM:

• 5 years fixed, adjusts every 5 years
• Less frequent changes
• More predictable

Pros of ARMs

✅ Lower initial rate

• Typically 0.5-1% below fixed
• Lower monthly payment
• Qualify for larger loan

✅ Savings if you move early

• Pay lower rate for years you're there
• Don't pay for long-term protection
• Perfect for short-term ownership

✅ Rate may drop

• Could decrease after adjustment
• Benefit from falling rates
• No refinancing needed

✅ Qualify for more home

• Lower payment = higher approval
• Based on initial rate only
• Purchase more expensive home

Cons of ARMs

❌ Payment uncertainty

• Can increase significantly
• Budget becomes difficult
• Stress from unpredictability

❌ Rate increase risk

• Could hit lifetime cap
• Payment shock possible
• Monthly payment could jump $500+

❌ Complexity

• Must understand caps, index, margin
• Not intuitive
• Harder to comparison shop

❌ Qualification at adjusted rate

• Lenders qualify at higher rate (initial rate + 2%)
• May not qualify at adjusted payment
• Risk if income doesn't increase

Head-to-Head Comparison

Same Loan: $300,000

30-Year Fixed at 7%:

• Year 1-30 payment: $1,996
• Total paid: $718,527
• Total interest: $418,527

5/1 ARM starting at 6.25%:

• Years 1-5 payment: $1,847
• Year 6: 7.25% = $2,046
• Year 7: 7.75% = $2,150
• Year 8: 8.25% = $2,254
• Years 9-30: Average 8% = $2,201

Assumptions:

• Rates increase 0.5% annually to 8%
• Stay at 8% for remainder

Totals:

• Total paid: $732,000
• Total interest: $432,000

Result: Fixed-rate saved $13,473 (if rates rise)

But if you sell after 7 years:

30-Year Fixed:

• Total paid: $167,664
• Balance remaining: $279,383

5/1 ARM:

• Total paid: $152,436
• Balance remaining: $277,789

Result: ARM saved $15,228 + $1,594 = $16,822

When to Choose Fixed-Rate

✅ Scenario 1: Long-Term Home (7+ Years)

Why: Lock in rate for entire ownership period

Example:

• Forever home
• Last home before retirement
• Growing family

Math:

• Break-even typically 7 years
• Long-term certainty worth premium
• Avoid multiple rate adjustments

✅ Scenario 2: Rates Are Low

Current situation (2026): Rates around 7% = historically moderate

When rates are low:

• Lock in while possible
• Protection against future increases
• Historical average is 7-8%

Rule of thumb: If rate < 6%, choose fixed

✅ Scenario 3: Rising Rate Environment

Indicators:

• Fed raising rates
• Inflation increasing
• Economy strengthening

Strategy: Lock in before further increases

✅ Scenario 4: Budget Requires Certainty

Best for:

• Fixed income
• Tight budget
• Risk-averse personality
• Retirement planning

Value: Peace of mind worth the cost

✅ Scenario 5: First-Time Buyers

Why:

• Less experience with rate changes
• Need payment predictability
• Building financial cushion

Recommendation: Start with fixed, refinance later if beneficial

When to Choose ARM

✅ Scenario 1: Short-Term Home (3-7 Years)

Why: Leave before rate adjusts significantly

Examples:

• Starter home
• Job relocation expected
• Military assignment
• Growing family

Savings:

• $100-150/month lower payment
• $4,000-$6,000+ over 5 years
• No future rate risk if selling

✅ Scenario 2: Rates Are High

Current situation (2026): Rates around 7% = consider ARM

When rates are high:

• Initial savings significant
• Likely to fall in future
• Can refinance to fixed later

Strategy: Take ARM, refinance to fixed when rates drop

✅ Scenario 3: Expecting Income Growth

Good for:

• Career advancement path
• Dual income household (one spouse returning to work)
• Business owner with growing revenue

Why: Can handle future payment increases

✅ Scenario 4: Falling Rate Environment

Indicators:

• Fed cutting rates
• Economic slowdown
• Inflation decreasing

Benefit: Rate adjusts down automatically

✅ Scenario 5: Need Larger Loan

Qualification:

• Lower ARM rate = higher approval amount
• Based on initial rate
• Qualify for $20,000-$50,000 more home

Example:

• Income: $100,000
• Fixed rate (7%): Qualify for $360,000
• ARM rate (6.25%): Qualify for $390,000

Caution: Ensure you can afford adjusted payment

Real-World Scenarios

Scenario 1: Young Professional in Starter Home

Situation:

• Age: 28
• Income: $85,000
• Home price: $325,000
• Plan: Upgrade in 5-7 years

Option A: 30-Year Fixed at 7%

• Payment: $2,162
• 5-year interest: $114,725

Option B: 5/1 ARM at 6.25%

• Payment: $1,999
• 5-year interest: $100,150
• Savings: $14,575

Recommendation: ARM (planning to move before adjustment)

Scenario 2: Family Forever Home

Situation:

• Age: 42
• Income: $150,000
• Home price: $550,000
• Plan: Live here until retirement (20+ years)

Option A: 30-Year Fixed at 7%

• Payment: $3,659
• Total interest: $767,301

Option B: 5/1 ARM at 6.25%

• Initial payment: $3,386
• Potential max payment: $4,927 (at lifetime cap)
• Projected total interest: $825,000+

Recommendation: Fixed (long-term, avoid rate risk)

Scenario 3: Military Family

Situation:

• Age: 35
• Income: $95,000
• Home price: $280,000
• Plan: PCS (move) in 3-4 years

Option A: 30-Year Fixed at 7%

• Payment: $1,864
• 3-year interest: $58,500

Option B: 3/1 ARM at 6%

• Payment: $1,679
• 3-year interest: $50,100
• Savings: $8,400

Recommendation: ARM (definitely moving before adjustment)

Scenario 4: Pre-Retirement Couple

Situation:

• Age: 58
• Income: $180,000
• Home price: $450,000
• Plan: Retire in 7 years, live here 15+ years

Option A: 15-Year Fixed at 6.5%

• Payment: $3,918
• Total interest: $255,240
• Paid off before retirement

Option B: 7/1 ARM at 6%

• Initial payment: $3,597
• After 7 years: Unknown, could be higher
• Retirement with mortgage

Recommendation: 15-year fixed (eliminate debt before retirement)

Hybrid Strategy: Start ARM, Refinance to Fixed

The Strategy

Year 0-5: Take 5/1 ARM at lower rate Year 4-5: Monitor rates Year 5: Refinance to 30-year fixed before adjustment

When It Works

Conditions:

• Current rates are high
• Expect rates to drop in 3-5 years
• Have good credit for refinancing
• Can afford refinance costs

Example

Purchase:

• Loan: $350,000
• 5/1 ARM: 6.25%
• Payment: $2,154

Years 1-5:

• Monthly savings vs. fixed: $178
• Total savings: $10,680

Year 5 refinance:

• Balance: $324,789
• New rate: 5.5% (rates dropped)
• New payment: $1,845
• Refinance cost: $3,500

Result:

• Saved: $10,680 in years 1-5
• Lower payment going forward
• Net positive: $7,180 + future savings

Risks

Rate don't drop:

• Refinance to same or higher rate
• Pay $3,500 in costs
• Would've been better with fixed

Credit score drops:

• May not qualify for refinance
• Stuck with ARM adjustments
• Payment increases

Home value drops:

• Can't refinance without appraisal
• May need to bring cash to close
• LTV ratio issues

Mortgage Calculator Comparison

Calculate Your Scenarios

Use our tools:

Mortgage Calculator

• Compare fixed vs. ARM payments
• See amortization schedules
• Model different rate scenarios

Mortgage Refinance Calculator

• Determine when to refinance ARM to fixed
• Calculate break-even point
• Analyze costs vs. savings

Key Numbers to Compare

Monthly payment difference:

• ARM vs. Fixed initial
• Potential ARM maximum
• Budget impact

Break-even timeline:

• Years until fixed is better
• Your planned ownership period
• Margin of safety

Worst-case scenario:

• ARM at lifetime cap
• Can you afford it?
• Risk tolerance level

Decision Framework

Step 1: Determine Ownership Timeline

Questions:

• How long will you live here?
• Job stability?
• Family growth plans?
• Relocation likelihood?

If < 5 years: Strong ARM candidate If 5-10 years: Depends on other factors If > 10 years: Likely fixed-rate

Step 2: Assess Rate Environment

Current rates (2026): ~7%

Historical context:

• 1990s: 8-10%
• 2000s: 5.5-6.5%
• 2010s: 3.5-4.5%
• 2020-2021: 2.5-3%
• 2022-2024: 6-7%
• 2025-2026: 6.5-7.5%

If historically low (<4%): Choose fixed If historically high (>7%): Consider ARM

Step 3: Calculate Payment Scenarios

Fixed payment:

• Will this work for 30 years?
• Comfortable with inflation?
• Income expected to grow?

ARM maximum payment:

• Can you afford at lifetime cap?
• 2x emergency fund if needed?
• Income growth likely?

Step 4: Assess Risk Tolerance

Risk-averse:

• Value certainty
• Fixed-income
• Prefer guaranteed outcomes
• → Choose fixed

Risk-tolerant:

• Comfortable with uncertainty
• Strong income growth
• Good financial cushion
• → Consider ARM

Step 5: Run the Numbers

Use calculator to compare:

• Monthly payment difference
• Total interest over ownership period
• Savings if rates stay stable
• Cost if rates increase

Frequently Asked Questions

Can I refinance from ARM to fixed later?

Yes, but you'll pay $2,000-$5,000 in closing costs and need good credit and home equity. Rates must be favorable for it to make financial sense. Plan for this possibility when choosing an ARM.

What if I choose fixed and rates drop?

You can refinance to a lower fixed rate or ARM, but you'll pay closing costs. If rates drop significantly (1%+), refinancing often makes sense despite costs.

How often do ARM rates typically adjust?

Most ARMs adjust annually after the initial fixed period. Some adjust every 6 months or every 5 years. Check your specific ARM terms for adjustment frequency.

Can my ARM payment ever decrease?

Yes, if the index rate decreases, your ARM rate and payment will decrease at the next adjustment. This is one benefit of ARMs in falling rate environments.

What's a hybrid ARM?

A hybrid ARM has an initial fixed-rate period (3, 5, 7, or 10 years), then adjusts periodically. This is what most people mean when they say "ARM"—like a 5/1 or 7/1 ARM.

Do I pay PMI with an ARM?

Yes, if you put down less than 20%. PMI rules are the same for ARMs and fixed-rate mortgages. You can request removal once you reach 20% equity.

Can I make extra payments on an ARM?

Yes, extra payment rules are typically the same as fixed-rate mortgages. Extra payments reduce principal and can help you pay off before rates adjust significantly.

Which is better for first-time buyers?

Generally fixed-rate, for payment predictability and simplicity. However, if you're certain you'll move within 5-7 years, an ARM can save thousands.

Conclusion

The choice between fixed and adjustable-rate mortgages depends on your timeline, risk tolerance, and market conditions. Fixed-rate mortgages offer certainty and long-term protection, making them ideal for forever homes and risk-averse borrowers. ARMs provide lower initial rates and monthly savings, perfect for short-term ownership and those comfortable with uncertainty.

Choose fixed if:

• Staying 7+ years
• Rates are historically low
• Need budget certainty
• Risk-averse

Choose ARM if:

• Moving within 5-7 years
• Rates are historically high
• Expecting income growth
• Comfortable with risk

Use our mortgage calculator to model both scenarios with your specific numbers and make the best decision for your situation.

Compare Fixed vs ARM Mortgages →