Fixed-Rate vs. Adjustable-Rate Mortgage: Which Is Best in 2025?

Understanding how your mortgage works can make a big difference; not just in what you pay each month, but in how comfortable you feel with your loan long-term. Two of the most common options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Each one works a little differently, and depending on your goals, one might be a better fit than the other. Let’s break down how they compare so you can make a confident, informed decision.

Key Takeaways:

• A fixed-rate mortgage comes with an unchanging interest rate, so your monthly payment stays the same for the entire loan term.
• With an adjustable-rate mortgage (ARM), your interest rate can go up or down over time based on market trends.
•  ARMs typically start with a lower rate than fixed-rate loans, which can mean lower initial monthly payments.
• ARMs can be complex, with more moving parts to understand.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a loan where the interest rate stays the same for the entire life of the loan. Whether you choose a 15-year or 30-year mortgage, your monthly principal and interest payments won’t change. This predictability is what makes fixed-rate mortgages a favorite for many buyers.

Pros of a Fixed-Rate Mortgage

• Stable monthly payments: This is great for long-term budgeting and financial planning.
• Simplicity: These loans make it easier to budget long-term compared to adjustable-rate mortgages.
• Protection from rate hikes: Your rate won’t rise even if market rates change.

Cons of a Fixed-Rate Mortgage

• Higher initial rates: Compared to ARMs, your starting rate may be significantly higher.
• No automatic benefit if rates drop: You’d need to refinance to take advantage of lower rates, which come with closing costs
• Harder to qualify when rates are high: Higher monthly payments can limit affordability.

The main advantage of a fixed-rate loan is that your monthly payment won’t go up if interest rates rise.

Quick Note on Terms: You might hear the phrase “fixed loan” used interchangeably with “fixed-rate loan,” but they’re not exactly the same. A fixed loan simply means the loan has a set repayment schedule and doesn’t change over time. A fixed-rate loan specifically refers to the interest rate staying the same for the life of the loan, which is what affects your monthly mortgage payment. So, while all fixed-rate loans are fixed loans, not all fixed loans necessarily have a fixed interest rate.

What Is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage has a variable interest rate that changes over time. Most ARMs begin with a fixed rate for a set period, such as 3, 5, 7, or 10 years, followed by periodic adjustments based on current market conditions.

In today’s market, ARMs can look appealing because their initial interest rates are often lower than fixed-rate loans. This can help buyers qualify for a larger loan or reduce their upfront monthly payments.

Pros of an Adjustable-Rate Mortgage

• Lower starting payments: ARMs may help you save money in the early years of the loan.
• Potential to benefit from falling rates: If market rates drop, your mortgage rate and payments may go down.
• Helpful for short-term homeowners: It's a great option if you plan to move or refinance before the rate adjusts.

Cons of an Adjustable-Rate Mortgage

• Unpredictable future payments: Rates can rise sharply, making monthly payments harder to manage.
• More complex terms: Understanding adjustment caps, index rates, and margins can be complicated and takes extra patience.

Fixed-Rate vs. Adjustable-Rate Mortgages: What’s the Better Choice in 2025?

With mortgage rates higher than we’d like and an unpredictable market, both options offer potential benefits depending on your situation.

A fixed-rate loan is ideal if you plan to stay in the home long-term and want stable payments that won’t change, no matter what happens in the economy. It’s also a smart choice if you’re concerned about rising rates or don’t want to deal with the uncertainty of future monthly payments or adjustments.

On the other hand, an ARM could make sense if you’re planning to sell the home or refinance in a few years, or if you’re confident your income will grow and can handle a potential payment increase later.

Adjustable-Rate Mortgages: Key Terms to Know

If you’re leaning toward an ARM, here are a few important terms to understand:

• Initial fixed period: The set number of years (e.g. 5, 7, or 10) your rate stays unchanged.
• Adjustment frequency: How often the interest rate can change after the fixed period ends.
• Index + margin: Your new rate is based on a market index (like the SOFR or Treasury rate) plus a set margin (e.g. 2%).
• Rate caps: Limits on how much your interest rate can increase per year and over the life of the loan.
• Ceiling: The maximum interest rate your ARM loan can ever reach.

Understanding these terms can help you evaluate different ARM options and avoid unpleasant surprises down the road.

How to Choose a Fixed vs. Adjustable-Rate Mortgage

Here are a few questions to ask yourself when deciding between a fixed-rate mortgage and an ARM:

• How long do I plan to stay in this home?
• Can I afford the payment if interest rates go up?
• Do I want the ability to budget for a consistent monthly payment?

If you’re only planning to stay in the home for a short time, or expect your financial situation to change, an ARM might be the better short-term strategy. But if you want predictability and peace of mind, a fixed-rate mortgage can help you sleep better at night.

If you need help comparing your options, our team at Churchill Mortgage is here to guide you. Let’s talk through your goals and help you find a smart path forward.

Frequently Asked Questions

Check our FAQs for responses to our most popular questions about fixed-rate and adjustable-rate mortgages.