What is the difference between a fixed-rate and adjustable-rate mortgage?

A fixed-rate mortgage (FRM) charges the same interest rate for the entire loan term, so your principal-and-interest payment never changes. An adjustable-rate mortgage (ARM) has a fixed rate for an initial period (commonly 5, 7, or 10 years), then the rate adjusts periodically based on a public index plus a lender margin. ARMs typically start with a lower rate than equivalent fixed loans but can rise or fall over time.

When does an ARM make sense versus a fixed-rate mortgage?

An ARM makes the most sense when (1) you plan to sell or refinance before the initial fixed period ends, (2) the initial rate discount is meaningful (typically 0.25% to 0.5% below the equivalent fixed rate), and (3) you can absorb the worst-case payment if rates rise to the lifetime cap. ARMs often win for relocations, starter homes, and borrowers who expect rates to fall. Fixed-rate loans win for long-term owners who want payment certainty.

What is a 5/1 ARM and how does it adjust?

A 5/1 ARM has a fixed rate for the first 5 years, then adjusts once per year for the remaining 25 years of a 30-year term. Each adjustment is governed by an adjustment cap (typically 2% per year) and a lifetime cap (typically 5% or 6% above the initial rate). At each adjustment, the new rate equals a public index (like SOFR or the Treasury rate) plus a lender margin specified in your loan documents.

How is the worst-case ARM payment calculated?

The worst-case ARM payment assumes the rate rises by the maximum allowed amount at every adjustment until it hits the lifetime cap. For a 5/1 ARM with a 5.5% initial rate, 2% per-adjustment cap, and 5% lifetime cap, the rate would climb to 7.5% in year 6, 9.5% in year 7, and 10.5% (the cap) in year 8 onward. The payment is recomputed each year on the remaining balance at the new rate. This is a conservative scenario — actual rates may rise less or even fall.

Can I refinance an ARM into a fixed-rate mortgage later?

Yes. Most ARM borrowers plan to refinance into a fixed-rate loan before the first adjustment, or sell the home. However, refinancing depends on (1) interest rates at that time (if rates have risen, the new fixed rate may be higher than your ARM's initial rate), (2) your home value and equity (you typically need 20% equity to refinance without PMI), and (3) your credit and income. Refinancing also incurs closing costs (typically 2% to 5% of the loan). Plan for the worst case where refinancing may not be available.

What are the caps on an ARM and why do they matter?

ARMs have three caps that limit rate increases: (1) the initial adjustment cap, which limits the first change after the fixed period (often 2% or 5%); (2) the periodic adjustment cap, which limits each subsequent change (typically 2% per year); and (3) the lifetime cap, which limits the total increase above the initial rate (typically 5% or 6%). Caps matter because they define your worst-case payment. A tighter lifetime cap means less risk but often a higher initial rate.

Are ARMs riskier than fixed-rate mortgages?

ARMs transfer interest-rate risk from the lender to the borrower. If rates rise, your payment can increase significantly — sometimes by 30% to 50% in worst-case scenarios. If rates fall, your payment can decrease, but you bear the cost of monitoring and the uncertainty of budgeting. Fixed-rate loans eliminate this risk: the lender absorbs the rate risk, which is why fixed loans typically start 0.25% to 0.5% higher. Whether ARM risk is acceptable depends on your holding period, income stability, and ability to refinance.

What happens to my ARM if interest rates fall?

If rates fall, your ARM's rate adjusts downward at each periodic reset, lowering your monthly payment. However, the rate can only fall to the floor specified in your loan (often the margin, with no negative index contribution), and ARMs typically have a floor equal to the initial rate or the margin. In practice, falling-rate environments are also good times to refinance into a fixed-rate loan to lock in the lower rate permanently. Most ARM borrowers refinance to fixed when rates drop.

Fixed vs Variable Rate Mortgage Comparison

A fixed vs variable rate mortgage comparison tool is a free online tool that compares fixed-rate mortgages against adjustable-rate mortgages (ARMs). It shows initial payments, worst-case scenarios, and total cost differences side by side. Free, no sign-up required.

Loan Details

Loan Amount?The total amount you want to borrow.

Fixed Rate?An interest rate that stays the same.

ARM Initial Rate?Enter your arm initial rate.

ARM Fixed Period?Enter your arm fixed period.

ARM Adjustment Cap?Enter your arm adjustment cap.

ARM Lifetime Cap?Enter your arm lifetime cap.

Loan Term?The length of your mortgage in years. Common terms are 15 or 30 years.

End of inputs

Fixed Rate vs Variable Rate (ARM)

Metric	Fixed Rate Constant 6.50% rate for 30 years	Variable Rate (ARM) Starts at 5.50%, caps at 11.50%
Initial Payment	$1,896.20	$1,703.37
Max Payment	$1,896.20	$2,819.50
Total Interest	$382,636.71	$313,210.43
Total Cost	$682,636.71	$613,210.43

The ARM starts $193/month lower but could rise to $2,820 at the lifetime cap. Choose fixed for payment certainty; choose ARM if your holding period fits the fixed window.

Key Insights

Worst-case, your ARM payment could rise from $1,703.37 to $2,819.50 — a $1,116.13 (65.52%) increase if rates hit the lifetime cap of 11.50%. This is payment shock that would strain most budgets. Only take the ARM if you can absorb this worst-case payment or have a clear exit (sale or refinance) before the cap is reached.

The ARM's initial payment of $1,703.37 is $192.83 lower than the fixed-rate's $1,896.20 — a 10.17% discount. This sizable monthly savings is the primary appeal of the ARM during the 5-year fixed period. If you sell or refinance before the first adjustment, you capture the savings without bearing the rate risk.

Your fixed rate of 6.50% is 1.00% higher than the ARM's initial 5.50% — an unusually wide spread. This large discount can translate to meaningful savings over the 5-year fixed period, but verify the ARM isn't a teaser that requires points or has unfavorable post-adjustment terms.

Your 30-year holding plan extends well beyond the ARM's 5-year fixed period — you'd face many years of adjustment risk where rates could climb to the lifetime cap. For long horizons, the fixed-rate loan's payment certainty usually outweighs the ARM's modest initial discount. Choose the ARM only if you have a strong refinance plan.

Your fixed rate is in the middle of the historical range. Neither the ARM nor the fixed-rate has a clear advantage based on rate environment alone; the decision hinges on your holding period, risk tolerance, and willingness to monitor rates for a refinance opportunity.

Guide

How to Use This Calculator

1Enter the loan amount you are borrowing (the principal, after your down payment).
2Set the fixed interest rate using the slider. Use a recent quote from your lender or a current 30-year fixed market average.
3Set the ARM's initial (teaser) rate using the slider. ARMs typically start 0.25% to 0.5% below equivalent fixed rates.
4Choose the ARM's initial fixed period: 5 years (5/1 ARM), 7 years (7/1 ARM), or 10 years (10/1 ARM). Shorter fixed periods usually mean larger initial discounts.
5Set the ARM's per-adjustment cap (typically 2%) and lifetime cap (typically 5% or 6% above the initial rate). These define your worst-case payment.
6Set the total loan term in years (typically 30 for both scenarios).
7Review the side-by-side comparison: initial payment, worst-case max payment, total interest, and total cost. Read the AI Insight for a personalized interpretation, then study the rate-curve chart to see how the ARM's worst-case rate climbs over time.

Formula

How It's Calculated

Fixed-Rate Monthly Payment (standard amortization):

M_fixed = P × [r(1+r)^n] / [(1+r)^n − 1]

Where:
- M_fixed = monthly P&I payment (constant for the life of the loan)
- P = loan amount (principal)
- r = monthly interest rate (annual rate ÷ 12)
- n = total number of payments (years × 12)

ARM Initial Payment (same formula, with the teaser rate):

M_arm_initial = P × [r_arm(1+r_arm)^n] / [(1+r_arm)^n − 1]

ARM Worst-Case Adjustment (at the lifetime cap):

At each adjustment, the rate is recomputed as:

r_new = min(r_previous + adjustment_cap, initial_rate + lifetime_cap, index + margin)

The new payment is then recomputed on the remaining balance over the remaining term:

M_new = balance_remaining × [r_new(1+r_new)^n_remaining] / [(1+r_new)^n_remaining − 1]

Worst-case rate path (used by this comparison):
- Years 1..initialYears: rate = initial_rate
- Year (initialYears+1): rate = initial_rate + adjustment_cap
- Year (initialYears+2): rate = initial_rate + 2 × adjustment_cap (capped at lifetime cap)
- ...continues until rate = initial_rate + lifetime_cap, then stays there

For a $300,000 5/1 ARM at 5.5% with 2% per-year cap and 6% lifetime cap:
- Initial rate: 5.5% (years 1-5)
- Year 6 rate: 7.5% (5.5% + 2%)
- Year 7 rate: 9.5% (5.5% + 4%)
- Year 8+ rate: 11.5% (5.5% + 6%, lifetime cap)
- Initial monthly P&I: $1,702.83
- Worst-case max monthly P&I: ~$2,950 (recomputed on remaining balance at 11.5%)

The comparison also computes the equivalent fixed-rate payment for the same loan amount and term, so you can see the trade-off between the ARM's initial discount and the fixed-rate's payment certainty.

Glossary

Key Terms

FAQ

Frequently Asked Questions

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