Fixed Rate Mortgage or Adjustable Rate Mortgage: Which is Best for Your Needs?

Fixed rate mortgages and adjustable rate mortgages (ARMs) are the two main mortgage types. Each type of mortgage is vastly different and deciding on which type to obtain when buying a home will save money and avoid costly mistakes. 

There are many variations of each type of loan which can make decisions more difficult, especially for first time home buyers. Following are the main differences between fixed rate mortgages and adjustable rate mortgages.

Fixed Rate Mortgages

Loan Type

Purchase Refinance with Cash out Refinance

State

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District Of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

FICO Score

Superior (780-850) Exceptional (760-779) Excellent (740-759) Very Good (720-739) Good (700-719) Above Average (680-699) Average (660-679) Fair (640-659) Need Improvement (620-639) Poor (350-620)

Loan Amount

$

Points

Up to 0 points Up to 0.5 points Up to 1 points Up to 1.5 points Up to 2 points Up to 2.5 points Up to 3 points

LTV

%

Loan Term

 15-Year Fixed  20-Year Fixed  30-Year Fixed  5-Year ARM  7-Year ARM  10-Year ARM

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The lenders whose rates and other terms appear on this chart are ICB's advertising partners. They provide their rate information to our data partner RateUpdate.com. Unless adjusted by the consumer, advertisers are sorted by APR from lowest to highest. For any advertising partners that do not provide their rate they are listed in advertisement display units at the bottom of the chart. Advertising partners may not pay to improve the frequency priority or prominence of their display. The interest rates, annual percentage rates and other terms advertised here are estimates provided by those advertising partners based on the information you entered above and do not bind. Any lender Monthly payment amounts stated do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Although our data partner RateUpdate.com collects the information from the financial institutions themselves, the accuracy of the data cannot be guaranteed. Rates may change without notice and can change intraday. Some of the information contained in the rate tables including but not limited to special marketing notes is provided directly by the lenders. Please verify the rates and offers before applying for a loan with the financial institution themselves. No rate is binding until locked by a lender.

Lender

APR / Rate

Fees / Points

Payment

NMLS #2006915

License: 60DBO-149268

5.582%

15-Year Fixed

5.375%

$5,417

Includes 0.868 points for $3,472

Lender Fees: $1,945

$3,242 /mo

Next >

NMLS #1835285

5.645%

15-Year Fixed

5.500%

$3,772

Includes 0.943 points for $3,772

Lender Fees: $0

$3,269 /mo

Next >

NMLS #401822

5.661%

15-Year Fixed

5.375%

$7,500

Includes 0.875 points for $3,500

Lender Fees: $4,000

$3,242 /mo

Next >

NMLS #1025894

5.667%

15-Year Fixed

5.490%

$4,616

Includes 0.979 points for $3,916

Lender Fees: $700

$3,267 /mo

Next >

NMLS #2326098

License: 60DBO-181478

5.674%

15-Year Fixed

5.500%

$4,725

Includes 0.693 points for $2,772

Lender Fees: $1,953

$3,269 /mo

Next >

NMLS #2059741

5.728%

15-Year Fixed

5.500%

$5,960

Includes 0.990 points for $3,960

Lender Fees: $2,000

$3,269 /mo

Next >

NMLS #757416

5.746%

15-Year Fixed

5.625%

$3,136

Includes 0.784 points for $3,136

Lender Fees: $0

$3,295 /mo

Next >

NMLS #2627028

5.782%

15-Year Fixed

5.625%

$4,171

Includes 0.720 points for $2,880

Lender Fees: $1,291

$3,295 /mo

Next >

NMLS #1701910

5.808%

15-Year Fixed

5.750%

$1,490

Includes 0.000 points for $0

Lender Fees: $1,490

$3,322 /mo

Next >

NMLS #2326098

License: 60DBO-181478

6.505%

5-Year ARM

6.375%

$5,641

Includes 0.922 points for $3,688

Lender Fees: $1,953

$2,496 /mo

Next >

NMLS #2006915

License: 60DBO-149268

6.507%

5-Year ARM

6.375%

$5,565

Includes 0.905 points for $3,620

Lender Fees: $1,945

$2,496 /mo

Next >

NMLS #1835285

6.572%

30-Year Fixed

6.500%

$3,000

Includes 0.750 points for $3,000

Lender Fees: $0

$2,529 /mo

Next >

NMLS #757416

6.589%

30-Year Fixed

6.500%

$3,696

Includes 0.924 points for $3,696

Lender Fees: $0

$2,529 /mo

Next >

NMLS #1835285

6.590%

5-Year ARM

6.500%

$3,740

Includes 0.935 points for $3,740

Lender Fees: $0

$2,529 /mo

Next >

NMLS #2561451

6.600%

30-Year Fixed

6.490%

$4,655

Includes 0.665 points for $2,660

Lender Fees: $1,995

$2,526 /mo

Next >

NMLS #2006915

License: 60DBO-149268

6.618%

30-Year Fixed

6.500%

$4,945

Includes 0.750 points for $3,000

Lender Fees: $1,945

$2,529 /mo

Next >

NMLS #2059741

6.628%

30-Year Fixed

6.490%

$5,772

Includes 0.943 points for $3,772

Lender Fees: $2,000

$2,526 /mo

Next >

NMLS #1025894

6.727%

30-Year Fixed

6.625%

$4,204

Includes 0.876 points for $3,504

Lender Fees: $700

$2,562 /mo

Next >

NMLS #399799

6.728%

30-Year Fixed

6.625%

$4,416

Includes 0.772 points for $3,088

Lender Fees: $1,328

$2,562 /mo

Next >

NMLS #2627028

6.729%

30-Year Fixed

6.625%

$4,391

Includes 0.775 points for $3,100

Lender Fees: $1,291

$2,562 /mo

Next >

NMLS #2326098

License: 60DBO-181478

6.740%

30-Year Fixed

6.625%

$4,941

Includes 0.747 points for $2,988

Lender Fees: $1,953

$2,562 /mo

Next >

NMLS #401822

6.758%

30-Year Fixed

6.625%

$5,495

Includes 0.875 points for $3,500

Lender Fees: $1,995

$2,562 /mo

Next >

NMLS #1701910

6.786%

30-Year Fixed

6.750%

$1,490

Includes 0.000 points for $0

Lender Fees: $1,490

$2,595 /mo

Next >

NMLS #3030

6.889%

15-Year Fixed

6.750%

$3,500

Includes 0.875 points for $3,500

Lender Fees: $0

$3,540 /mo

Next >

NMLS #3030

7.602%

30-Year Fixed

7.500%

$4,000

Includes 1.000 points for $4,000

Lender Fees: $0

$2,797 /mo

Next >

Rate data provided by RateUpdate.com. Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes and insurance premiums. Actual payments will be greater with taxes and insurance included. Rate and product details.

Fixed rate mortgages have a "fixed interest rate" that is set when you obtain the loan and doesn't change for the life of the loan. Having a fixed rate for the entire period makes your monthly mortgage payments of principal and interest predictable since it never varies. Although the monthly mortgage payment to the bank will be the same, your monthly payments can go up if your escrow payments increase.

Escrow payments are for the property taxes and property insurance. Most homeowners pay escrow payments within their mortgage payments. The lender takes the escrow payments and pays the property tax and property insurance.

With a fixed rate mortgage, both the monthly principal (the debt you owe) and interest is paid down each month. The actual amount of principal and interest you pay each month varies. For the first years, most of your monthly payment goes towards interest and less towards paying down principal. Over time the amount of money going towards interest goes down and the principal payment increases.

The main reason fixed rate mortgages are the most popular is that the interest rate is fixed and the monthly payment is the same. The mortgagee doesn't have to worry about fluctuation in interest rates, which can cause the monthly payments to increase.  The downside is that if interest rates decline, your rate will remain the same.

To give you an idea of how greatly interest rates can fluctuate, today's (4/14/11) average 30 year fixed mortgage rate is 4.94. In the early 1980's 30 year fixed rates were as high as 17.25%

Fixed rate mortgages are available in several different terms. The most popular terms are 30 years and 15 years. If you can afford a 15 year loan, you will get a lower interest rate than a 30 year loan. You will also own your home outright in half the time. The only downside is your monthly mortgage payments will be substantially higher.

Adjustable Rate Mortgages

With adjustable rate mortgages (ARMs), the interest rate is fixed for an initial period of time but after the initial period, the interest rate can adjust every year. The initial mortgage rate on adjustable mortgages is lower than fixed mortgage rates.

To give you an example, right now fixed 30 year rates are at 4.94% and 5 year adjustable mortgage rates are at 3.40%.

When the interest rate "adjusts" on your loan, your monthly mortgage payments can go higher or lower. Adjustable mortgages are at the mercy of the prevailing interest rate but can increase even if interest rates do not go up. There are usually yearly caps and lifetime caps on how much the interest rate can increase, which can help limit the pain.

Deciding on the Ideal Home Loan

The first step to buying a home is deciding on which type of loan best suits your needs. Which is best depends on your financial situation, the amount of time you plan to be in the home and your tolerance for risk.

You can have your mortgage lender guide you and help you figure out which loan is better for you but you first need to understand both types loans and how selecting the right (or wrong) one can affect you.