Fixed Rate vs Adjustable Rate Mortgages

How to Determine Your Mortgage Needs

Choosing between a fixed-rate and adjustable-rate mortgage is a crucial decision that depends on your financial goals and market conditions. Fixed-rate mortgages offer stability with consistent payments, making them ideal for long-term homeowners. Adjustable-rate mortgages, on the other hand, start with lower rates but adjust over time, which can be beneficial if rates decline or if you plan to move before the adjustment period. To make an informed choice, explore our Mortgage 101 guide, which breaks down loan types and their implications. If you're considering refinancing, our Mortgage Refinance resource provides insights into switching loan types. For a broader understanding, check out our article on Understanding Mortgages.

You are ready to apply for a mortgage. Your question? Should you take out a fixed-rate loan or an adjustable rate?

As with most mortgage questions, there is no one correct answer. Instead, the right loan for you depends upon many factors, everything from how low or high average mortgage rates are when you are ready to apply for a loan to your family's financial situation.

What is the best way to decide whether you should aim for a fixed-rate or adjustable-rate loan? Do the research.

Before deciding whether a fixed-rate or adjustable-rate mortgage is right for you, you need to learn the fundamental differences between the two.

As the name suggests, the interest rate does not change with a fixed-rate mortgage over the loan term. So no matter whether your loan extends for 30 years, 15 years, or some other length of time, your interest rate will remain unchanged throughout the loan.

An adjustable-rate mortgage works oppositely. Your interest rate will change after a set number of years, often five or seven. Usually, the rate starts lower for the first few years and then adjusts to a new rate based on economic factors. The rate does not have to go higher after the adjustment period, but it usually does.

Each loan type comes with its benefits. For fixed-rate mortgage loans, the advantage is obvious: There are no surprises with this kind of loan. You will know each month exactly what your mortgage payment will be. It will not rise or fall.

A fixed-rate mortgage loan is especially attractive when low average mortgage interest rates. That has indeed been the case over the last several years. Interest rates on 30-year fixed-rate mortgage loans are about 7.07% percent in January 2025, which is a 0.41 percent increase from the year prior. Rates have increased exponentially due to inflation.

Fixed-rate loans currently make good economic sense for homeowners who want the lowest possible mortgage payment each month. However, taking out an adjustable-rate loan in such a rate climate might be a risk. After all, when an adjustable-rate mortgage loan adjusts in five or seven years, there's no guarantee that interest rates will not be higher than they were this past year. 

Adjustable-rate mortgage loans make the most sense when average mortgage interest rates are high. Lenders can usually provide borrowers with a lower initial interest rate. After all, they can raise the rate later if rates rise to a higher level during the mortgage term.

If rates are high, then borrowers who take out an adjustable-rate mortgage loan will enjoy a lower interest rate for a set period, again, usually five to seven years. That can result in significantly lower monthly mortgage payments during this time.

However, there is a risk. After the adjustment period, your interest rate might jump by a fairly significant amount. Before taking out an adjustable-rate mortgage, ensure that you can afford whatever the adjusted monthly payment would be. You might be able to factor in future pay raises to help you make those higher payments if you believe that your income will grow over time.

Like all mortgage products, adjustable-rate and fixed-rate mortgage loans come with their pros and cons. Your best bet is to study both products carefully before making your choice.

What's Next?

Now that you've explored the differences between fixed-rate and adjustable-rate mortgages, the next step is determining which option aligns best with your financial goals. Salem Five Bank offers insights and guidance on mortgage solutions to help you make an informed decision. Whether you're looking for stability with a fixed-rate loan or flexibility with an adjustable-rate mortgage, understanding your options can set you up for long-term success. Ready to take the next step? Connect with a lending specialist to explore your best path forward.

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FAQs: Fixed Rate vs Adjustable Rate Mortgages

• What are the key differences between fixed-rate and adjustable-rate mortgages?
  • Fixed-rate mortgages maintain the same interest rate for the entire loan term, providing payment stability. Adjustable-rate mortgages (ARMs) start with a lower initial rate that changes periodically based on market conditions, which can lead to either lower or higher payments over time.
• When does an adjustable-rate mortgage typically adjust?
  • Most ARMs adjust after an initial fixed period, commonly five or seven years. After this period, the rate fluctuates periodically based on financial market indices.
• How do I decide which mortgage type is best for me?
  • Consider factors such as your long-term housing plans, risk tolerance, and current market interest rates. If you prefer predictable payments and plan to stay in your home long-term, a fixed-rate mortgage may be preferable. If you're comfortable with payment fluctuations or plan to move before the adjustment period, an ARM may be a better fit.
• What happens to my payment if mortgage rates rise with an ARM?
  • If rates increase after the initial fixed period, your monthly payments will likely rise. Before committing to an ARM, ensure you can afford potential rate increases.
• Can I switch from an adjustable-rate mortgage to a fixed-rate mortgage later?
  • Yes, borrowers can refinance their ARM into a fixed-rate mortgage if market conditions are favorable. Salem Five Bank offers refinancing options that may help you secure a more stable loan structure.

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