Deciding Between an ARM and a Fixed-Rate Mortgage

Deciding Between an ARM and a Fixed-Rate Mortgage

If you're buying a home and intend to stay there long-term, you might lean toward the stability of a 30-year fixed-rate mortgage. But if you anticipate selling and moving within a few years, consider an adjustable-rate mortgage (ARM), particularly when ARMs feature the lowest interest rates available. Let me walk you through how to make this choice.

Key Takeaways

ARMs can start with lower interest rates than fixed-rate loans, though this isn't guaranteed. If you plan to sell your home soon, a low-rate ARM could reduce your interest expenses. That said, once the ARM adjusts, it might become costlier than a fixed-rate option if rates are climbing, but it could save you money if rates fall.

Understanding the Basics: ARM vs. 30-Year Fixed

An ARM begins with a fixed interest rate for an initial period, like three, five, or 10 years. After that, the rate and your monthly payment adjust periodically, tied to an index such as the U.S. prime rate or the one-year constant maturity treasury (CMT).

In contrast, a 30-year fixed-rate mortgage secures your rate for the entire 30 years, keeping your interest rate and monthly payment unchanged. Fixed-rate options also exist in shorter terms, like 15 or 20 years.

The 5-Year Plan: Why an ARM Might Appeal

ARMs frequently come with lower starting rates, often called teaser rates. This means you could pay less monthly if you opt for a 5-year ARM and sell before the fixed period ends, avoiding any rate increase.

What Are the Risks? When an ARM Can Go Wrong

The main risk with an ARM is if your plans shift—you might decide to stay longer, or selling becomes tough due to market conditions. Refinancing at the end of the initial period could also prove challenging if your finances deteriorate.

Fortunately, ARMs include caps that restrict how much the rate can rise per adjustment or over the loan's life, offering some safeguard against steep increases. Before committing to an ARM, ensure you understand its specific caps.

Could an ARM Save You Money Right Now?

ARMs typically start lower than 30-year fixed rates, but not always. For instance, on July 25, 2025, the average 30-year fixed rate for new purchases was 6.89%, per Investopedia's tracking, while a 5/6 ARM averaged 7.35%. In this scenario, the fixed rate is cheaper initially, and it won't rise.

Remember, these are national averages—rates differ by location and lender, so shop around. You might find an ARM with a compelling teaser rate, making it worthwhile for a stay of five years or less. Shorter ARMs, like a 3/1, usually have even lower initial rates than 5/6 or 7/6 versions.

The Bottom Line

Currently, on average, 5-year ARMs are slightly pricier than 30-year fixed loans nationally, but this can shift, and shorter ARMs often have better rates. Rates vary by home location and lender, so compare them regularly before deciding.

If you choose an ARM and hold it past the initial period during rising rates, it could get more expensive with each adjustment. On the flip side, falling rates might lower your costs. As with any uncertain element, outcomes depend on future economic shifts, bringing potential risks or benefits.