Fixed vs. Adjustable Rate Mortgages

A fixed-rate mortgage locks in the same interest rate for the entire loan term, so the principal-and-interest portion of the payment never changes, no matter what happens to interest rates in the wider economy. An adjustable-rate mortgage, often called an ARM, starts with a rate that can later move up or down based on broader market conditions.

Adjustable-rate mortgages typically offer a lower interest rate during an initial fixed period, which can make the early payments noticeably cheaper than a comparable fixed-rate loan. After that initial period ends, the rate adjusts periodically based on a market index, and the payment adjusts along with it — up or down, depending on where rates have moved.

The trade-off comes down to who's carrying the risk of future rate changes. Here's a simplified comparison of what the same loan amount can cost at two different rates.

Loan: $200,000 over 30 years

At a 4% rate: payment ≈ $955/month
At a 7% rate: payment ≈ $1,331/month

Same loan amount, same term — just comparing the payment
at the lower initial ARM-style rate versus a rate it could
adjust to later.

A fixed-rate mortgage keeps the same interest rate for the entire loan term, while an ____ mortgage can change after an initial period.

Neither structure is universally right. A fixed rate trades a potentially higher starting rate for total predictability, which matters most to someone planning to stay long enough for a rate move to matter. An ARM trades that predictability for a lower starting cost, which can make sense for someone who expects to sell or refinance before the rate ever adjusts.

What is the core trade-off between a fixed-rate mortgage and an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage's interest rate can only ever move in the borrower's favor after the initial period ends.