Fixed vs. Adjustable Rate Mortgages
A fixed-rate mortgage maintains the same interest rate for the entire loan term. Your principal and interest payment never changes, providing certainty and protection against rising rates. Fixed rates are higher than introductory ARM rates because you're paying for the stability guarantee. An adjustable-rate mortgage (ARM) begins with a fixed period (e.g., a 5/1 ARM is fixed for 5 years, then adjusts annually). ARMs are expressed as X/Y: X = years of initial fixed rate, Y = adjustment frequency after the fixed period. ARMs typically start with a lower rate than fixed-rate mortgages (called a 'teaser' rate), but after the fixed period, the rate adjusts based on a benchmark index (usually SOFR — Secured Overnight Financing Rate) plus a margin. ARMs have caps that limit how much the rate can increase: a 2/2/5 cap structure means the rate can rise maximum 2% at first adjustment, maximum 2% per subsequent adjustment, and maximum 5% total over the loan's life. ARMs work in the buyer's favor when: rates are high and expected to fall, or when the buyer plans to sell before the fixed period ends. Fixed rates are better when: rates are low, or the buyer plans long-term ownership and values payment predictability.