ARM vs. Fixed-Rate Mortgage: What’s the Difference?

Choosing a mortgage isn’t only about comparing interest rates. It’s also about choosing a loan structure that fits your budget, your plans, and how comfortable you are with potential changes over time.

Two common options are fixed-rate mortgages and adjustable-rate mortgages (ARMs). Both can help finance a home, but they handle interest rates differently.

Understanding those differences can help you have a more informed conversation with your mortgage advisor.

What Is a Fixed-Rate Mortgage?

With a fixed-rate mortgage, your interest rate remains the same for the life of the loan.

For example, with a 30-year fixed-rate mortgage, the interest rate established at closing remains unchanged throughout the loan term, assuming you keep the original loan.

That creates consistency in your monthly principal and interest payment. Your total mortgage payment can still change because of property taxes, homeowners insurance, or other escrowed expenses, but changes in market interest rates will not change the rate on your fixed-rate loan.

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage, or ARM, has an interest rate that remains fixed for an initial period and may adjust afterward at predetermined intervals.

Because the interest rate can change, your monthly principal and interest payment may increase or decrease after an adjustment.

ARM loans also include specific terms that determine:

• How long the initial rate remains fixed
• How often the rate may adjust afterward
• How the adjusted rate is calculated
• How much the rate is allowed to change

What Do 5/5, 7/3 and 10/3 ARMs Mean?

The numbers in an ARM name describe its rate structure.

The first number represents how many years the initial interest rate remains fixed. The second number represents how frequently the rate may adjust after that initial period.

For example:

So, with a 7/3 ARM, your initial interest rate remains fixed for seven years. After that, the rate may adjust once every three years according to the terms of the loan.

ARM vs. Fixed-Rate Mortgage at a Glance

Neither option is automatically better. The right fit depends on your financial situation, future plans, and the loan options available when you apply.

How Does an ARM Rate Adjust?

After the initial fixed-rate period, an ARM rate is generally determined using an index plus a margin.

For F&M Bank's current ARM structure, applicable adjustments use a U.S. Treasury rate plus a predetermined margin. The rate is also subject to the adjustment limits established by the loan.

ARM loans also include protections that limit how much the interest rate can change at an individual adjustment and over the life of the loan.

For the specific margins, caps, rate floor, and current F&M ARM options, visit our Adjustable-Rate Mortgage page.

A Simple ARM Example

Consider a 7/3 ARM. The initial interest rate would remain fixed for the first seven years. At the end of that period, the loan could reach its first adjustment.

The new interest rate would be determined using the applicable index, the loan’s margin, and its adjustment limits.

Three years later, the rate could adjust again according to the loan terms.

Which Mortgage Structure Should You Consider?

Rather than asking whether an ARM or fixed-rate mortgage is universally "better," consider how each option aligns with your circumstances.

An ARM may be worth discussing if you expect your housing or financing needs to change over time or want to compare an initial fixed period with other available mortgage options.

A fixed-rate mortgage may appeal to borrowers who place a higher priority on knowing their interest rate will remain unchanged for the entire loan term.

When comparing the two, ask yourself:

Your answers can help guide the conversation, but future plans can change. That's why it's important to understand both the initial terms and what could happen later in the loan.