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Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

Fixed-rate and adjustable-rate mortgages are two of the most popular loan types for buying a home or refinancing your mortgage (including cash-out refinances). Both options are available for conventional conforming loan amounts, jumbo (non-conforming) loan amounts, and FHA or VA programs.

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Fixed-rate mortgage
Adjustable-rate mortgage (ARM)
Features Features
  • Your interest rate and monthly principal and interest (P&I) payments remain the same for a defined initial period, then adjust annually when that initial period is over. 
  • Loans available in a variety of longer terms. 
  • Includes an interest rate cap that sets a limit on how high or how low your interest rate can go.
Benefits Benefits
  • Predictable monthly P&I payments allow you to budget more easily. 
  • Protection from rising interest rates for the life of the loan, no matter how high interest rates go. 
  • May be a good choice if you plan to stay in your home for a long time.
  • Typically ARMs have a lower initial interest rate than on a fixed-rate mortgage. 
  • The interest rate cap limits the maximum amount your P&I payment may increase or decrease at each interest rate adjustment and over the life of the loan. 
  • May provide flexibility if you expect future income growth or if you plan to move or refinance within a few years.
Considerations Considerations
  • The overall interest you pay is higher on a longer-term loan than on a shorter-term loan. 
  • On a shorter-term loan, the monthly P&I payment is typically higher than on a longer-term loan.
  • Monthly principal and interest payments may increase or decrease when the interest rate adjusts. 
  • Your monthly principal and interest payments may change every year after the initial fixed period is over.
Conventional conforming mortgage
A mortgage that is not obtained under a government program (FHA or VA) and satisfies the underwriting guidelines and loan limits set by Fannie Mae or Freddie Mac.

Principal and interest (P&I)
The 2 main components of your monthly payment. The principal portion reduces your loan balance, while the interest is your cost for using the principal. Your monthly payments may include taxes and insurance in addition to P&I.

Interest-rate cap
A limit on the amount your interest rate can increase or decrease. Periodic caps limit the increase or decrease from 1 adjustment period to the next. Lifetime caps limit the increase or decrease over the life of the loan.