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

A fixed-rate mortgage locks your interest rate for the entire loan term, keeping your principal-and-interest payment stable. An adjustable-rate mortgage (ARM) starts at a lower fixed rate for an introductory period, then adjusts periodically based on a market index — so your payment can rise or fall.

How a fixed-rate mortgage works

With a fixed-rate mortgage, the interest rate is set at closing and never changes. Your principal-and-interest payment stays identical every month for the life of the loan — 10, 15, 20, or 30 years. Only the escrow component (taxes and insurance) can change. Fixed-rate mortgages are the most common type in the U.S. because they make long-term budgeting predictable.

How an adjustable-rate mortgage (ARM) works

An ARM has two phases. During the initial fixed period — often 3, 5, 7, or 10 years — your rate is locked, typically lower than a comparable fixed-rate loan. After that, the rate adjusts at regular intervals based on a market index plus a margin. As the CFPB explains, when the index rises your payment goes up; when it falls it may decrease. A '5/1 ARM' means a 5-year fixed period then annual adjustments.

Rate caps on ARMs

ARMs have built-in rate caps that limit movement: an initial adjustment cap, a subsequent adjustment cap, and a lifetime cap. The CFPB describes these three caps. Before accepting an ARM, ask your lender for the worst-case payment at the lifetime cap.

When each type makes sense

Fixed-rate fits when: you plan to stay long-term, value payment certainty, or want to lock in favorable rates.
ARM may fit when: you plan to sell or refinance before the initial fixed period ends, or expect rates to fall.
CFPB caution: Don't assume you'll be able to sell or refinance before the rate adjusts — if plans change and rates rise, payments can jump.

Sources

With a fixed-rate mortgage the rate is set when you take the loan and won't change; with an ARM the rate may rise or fall after an initial fixed period. — CFPB — Fixed vs. Adjustable-Rate
ARMs typically include three rate caps: an initial adjustment cap, a subsequent adjustment cap, and a lifetime cap. — CFPB — ARM Rate Caps
The CFPB advises borrowers not to assume they can sell or refinance before an ARM's rate adjusts — plans change and rates may rise. — CFPB

Key takeaways

Fixed-rate: rate and P&I payment locked for the full term — no surprises.
ARM: lower starting rate but adjusts after the initial fixed period based on a market index.
ARM rate caps limit movement: initial, per-adjustment, and lifetime — always ask the worst-case payment.
ARMs suit short-term ownership; fixed rates suit long-term stability.