What is the difference between a fixed-rate and adjustable-rate mortgage?

A fixed-rate mortgage and an adjustable-rate mortgage are two common types of home loans that differ primarily in how interest rates are determined and maintained over the life of the loan. A fixed-rate mortgage has a constant interest rate throughout the duration of the loan, which can typically range from fifteen to thirty years. This means that the monthly mortgage payment remains stable, providing predictability for budgeting and financial planning. Borrowers favor this option for its stability, especially in a fluctuating interest rate environment, as they are shielded from potential rate increases in the future. On the other hand, an adjustable-rate mortgage, often referred to as an ARM, has an interest rate that may change periodically based on fluctuations in a specific benchmark or index. Typically, an ARM will start with a lower initial interest rate compared to a fixed-rate mortgage for a designated period, after which the rate may adjust at regular intervals—such as annually or every few years—depending on market conditions. While this initial lower rate can make ARMs attractive for borrowers, it introduces a level of uncertainty regarding future payments. The monthly payments can increase or decrease, which can significantly affect a borrower’s financial situation over time. When considering which type of mortgage is best, it is essential for borrowers to evaluate their financial goals, risk tolerance, and how long they plan to stay in the home. More information on these mortgage types and additional resources can be found on the current First Horizon Home Loans web page.