Adjustable-Rate Mortgage vs. Fixed Rate Mortgage

As interest rates continue to fluctuate, many homebuyers are exploring mortgage options that can help improve affordability. While rising rates often make headlines, they can also create opportunities. Higher rates may lead to increased housing inventory, reduced competition among buyers, and renewed interest in mortgage products that have been overlooked in recent years—such as the Adjustable-Rate Mortgage (ARM).

Every homebuyer has unique financial goals, timelines, and housing needs. Understanding all available financing options is essential when choosing the right mortgage. For some buyers, an ARM may provide lower initial payments and greater flexibility, especially if they do not plan to stay in the home long-term.

What Is an Adjustable-Rate Mortgage (ARM)?

An Adjustable-Rate Mortgage (ARM), sometimes called a variable-rate mortgage, is a home loan that features an interest rate that can change over time.

Most ARMs begin with a fixed interest rate for a specific introductory period. After that period ends, the interest rate may adjust periodically based on market conditions and the terms of the loan.

Because ARMs often start with lower interest rates than comparable fixed-rate mortgages, they may offer lower initial monthly payments for qualified borrowers.

ARM vs. Fixed-Rate Mortgage: What's the Difference?

The primary distinction between an ARM and a fixed-rate mortgage is how the interest rate is structured.

Fixed-Rate Mortgage

A fixed-rate mortgage maintains the same interest rate throughout the life of the loan. This provides predictable monthly principal and interest payments, making budgeting easier for many homeowners.

Learn more about available mortgage options through our Loan Programs page.

Adjustable-Rate Mortgage

An ARM begins with a fixed introductory rate and then adjusts according to market conditions after the initial fixed period ends. While future rates may increase or decrease, ARMs often offer lower starting rates than fixed-rate loans.

How Does an ARM Work?

Most ARMs use a hybrid structure that combines:

• An initial fixed-rate period
• Scheduled interest rate adjustments after the fixed period expires

Rate adjustments are typically based on a financial index, such as the Secured Overnight Financing Rate (SOFR), plus a lender-defined margin established when the loan is originated.

Most ARM products also include safeguards known as rate caps, which help limit how much the interest rate can increase during adjustment periods and throughout the life of the loan.

Common Types of Adjustable-Rate Mortgages

ARMs are commonly identified by two numbers, such as 5/6 or 7/6.

• The first number represents the number of years the initial interest rate remains fixed.
• The second number indicates how frequently the rate can adjust after the fixed period ends.

3/6 ARM

• Fixed interest rate for the first 3 years
• Rate adjusts every 6 months thereafter

5/6 ARM

• Fixed interest rate for the first 5 years
• Rate adjusts every 6 months thereafter

7/6 ARM

• Fixed interest rate for the first 7 years
• Rate adjusts every 6 months thereafter

10/6 ARM

• Fixed interest rate for the first 10 years
• Rate adjusts every 6 months thereafter

What Happens After the Fixed-Rate Period Ends?

Once the introductory period expires, your interest rate may increase, decrease, or remain relatively stable depending on market conditions and the terms of your mortgage.

To help protect borrowers from dramatic payment changes, ARMs typically include three types of rate caps:

Initial Adjustment Cap

Limits how much the interest rate can increase during the first adjustment period.

For example, if a 5/6 ARM has a 2% initial adjustment cap, the interest rate cannot increase by more than 2% at the first adjustment.

Periodic Adjustment Cap

Limits how much the interest rate can change during each subsequent adjustment period.

Lifetime Cap

Sets the maximum amount the interest rate can increase over the life of the loan.

How Are ARM Payments Calculated?

After the fixed-rate period ends, the new interest rate is generally calculated using:

Index + Margin = New Interest Rate

The index reflects broader market conditions, while the margin is established by the lender at loan closing and remains fixed.

Depending on market trends, future monthly payments could increase or decrease. Understanding these potential scenarios is important when evaluating whether an ARM aligns with your financial goals.

For additional mortgage education, visit our Loan Terminology resource center.

Why Should Homebuyers Consider an ARM?

For the right borrower, an ARM can offer several potential advantages:

• Lower initial monthly mortgage payments
• Reduced interest costs during the introductory period
• Greater purchasing power in certain market conditions
• Potential savings if rates decline in the future
• Flexibility for buyers planning to move, refinance, or upgrade within a few years

An ARM may be particularly attractive for professionals relocating to Tucson, first-time homebuyers, or homeowners who anticipate changing housing needs within the next several years.

If you're currently exploring homeownership opportunities, our Buy a Home resources can help you understand your financing options.

How Do You Choose the Right ARM Lender?

Not all mortgage solutions are right for every borrower. When shopping for an ARM, it is important to work with a knowledgeable mortgage professional who can clearly explain:

• Available ARM products
• Adjustment schedules
• Rate caps
• Potential payment scenarios
• Alternative loan options

A thorough review of your goals, budget, and future plans can help determine whether an ARM or a fixed-rate mortgage is the better fit.

Is an Adjustable-Rate Mortgage Right for You?

Homebuyers planning to stay in their home for many years and who prefer payment stability may benefit from a fixed-rate mortgage.

However, buyers seeking a lower initial interest rate, increased flexibility, or short-term homeownership plans may find an ARM to be a valuable financing solution.

Because every financial situation is unique, the best mortgage choice depends on your individual goals, timeline, and risk tolerance.

Frequently Asked Questions About ARMs

Are adjustable-rate mortgages risky?

ARMs carry more uncertainty than fixed-rate mortgages because rates can change after the introductory period. However, built-in rate caps help limit how much rates can increase.

Can ARM rates go down?

Yes. If market conditions decline and loan terms allow, an ARM's interest rate and payment could decrease during adjustment periods.

Who benefits most from an ARM?

Borrowers who expect to sell, relocate, refinance, or pay off their mortgage before the adjustment period begins may benefit most from an ARM.

Can I refinance an ARM later?

In many cases, homeowners may refinance into another mortgage product if it aligns with their financial goals and eligibility requirements.

Explore Your Mortgage Options with The Polder Group

Whether you're purchasing your first home, upgrading to a new property, or evaluating financing strategies in Tucson and Southern Arizona, understanding all available loan options is essential.

The Polder Group at CrossCountry Mortgage can help you compare adjustable-rate mortgages, fixed-rate loans, FHA loans, VA loans, conventional financing, and more. Contact our team today for personalized guidance, pre-approval assistance, and expert mortgage advice tailored to your goals.

This article is for educational purposes only and does not constitute financial or mortgage advice. Loan programs, rates, and guidelines may change at any time. All loans are subject to credit approval and underwriting. For guidance tailored to your situation, consult a licensed mortgage professional.