Pick the payment you can live with after the teaser ends
Educational overview. Not individualized financial, legal, or tax advice. How we source and check numbers.
A fixed rate is the quiet option. Principal and interest stay the same for 15 or 30 years. An adjustable-rate mortgage starts lower, then the rate can change after a set number of years. The useful question is whether you will still owe this loan when that change shows up, and whether the worst-case payment in the disclosures still fits the month.
"I will just refinance later" is a hope. Refinancing in year five still needs a job, a credit score, a home value, and closing costs that work. Those doors close for people. Read when refinancing makes sense before you count on it.
What the product is actually doing
On a fixed loan, the note rate is the rate for the whole term. On a 5/1 ARM, the rate is fixed for five years, then it can adjust once a year. A 7/1 waits seven years. A 10/1 waits ten. After the fixed window, the new rate is an index plus a margin. Caps limit how far it can jump in one adjustment and over the life of the loan. Those caps are the part people skip. A start rate of 6 percent does not describe the payment if the loan hits its lifetime cap. Ask the loan officer to write the worst-case payment down, using the caps in your disclosures, before you compare it with a fixed quote.
Take a $360,000 loan. At 6.75 percent fixed for 30 years, principal and interest is about $2,335. A 5/1 ARM at 6.00 percent starts near $2,158. That is roughly $177 a month, about $2,100 a year, for the first five years. Five years in, most of the balance is still there. On this illustration it is still around $335,000. If the rate then resets to 8 percent for the remaining 25 years, the payment jumps to about $2,586. That is higher than the fixed payment you passed on. If you have sold, paid the loan down, or refinanced before month 61, you never live with that number. If you are still in the house, you do.
| Product | First-year P&I | If you are still there in year six |
|---|---|---|
| 30-year fixed at 6.75% | About $2,335 | Still about $2,335 |
| 5/1 ARM at 6.00% | About $2,158 | About $2,586 if the rate resets to 8% |
Run your own rate and loan size on the mortgage calculator, then again at a rate 1.5 to 2 points higher. If the second payment makes the month feel tight, the ARM is a bet you may not want.
When the cheaper start rate is a plan, and when it is a wish
The fixed rate is the easier call when you expect to stay past the ARM's fixed window, or you honestly do not know; when a few hundred dollars more a month would mean cutting something you care about; and when you do not want to reopen the loan conversation in year five. It is also the easier call if you would lose sleep watching an index.
The ARM can fit when you have a real end date: a job move, a planned sale, or a payoff before the rate can change. You need cash set aside for a higher payment if the plan slips. You also need a full Loan Estimate, including caps, points, and APR, and savings in the fixed window large enough to matter. Compare the ARM and the fixed offer on the same lock length and the same point structure. A cheap ARM loaded with points is a different product from a par fixed loan.
Before you pick, get four things in writing: the start rate, the margin, the index, and each cap; the payment at the first adjustment if the index sits where it is today, and the payment at the lifetime cap; how points and lender credits differ from the fixed offer; and whether the lock still covers you if closing slips. That last question is the same one in lock now or wait. Current backdrop is on the market page.
The refinance you are counting on may not be available
Caps are the part of the disclosure people skip. A start rate does not describe the payment at the lifetime cap. Get that payment in dollars before you compare the ARM with a fixed quote. If the capped payment does not fit, the discount is a bet, not a plan.
The ARM looks cheaper because you are renting the rate for five or seven years and hoping the next loan is kinder. That hope needs four things still to be true in the year the fixed window ends: a job that documents the way underwriting wants, a credit score that has not slipped, a home value that still supports the balance, and closing costs you can pay or finance without wiping out the savings. Any one of those can close. People lose jobs. Scores drop after a medical bill. Values in a single neighborhood can stall while the national chart looks fine.
Price the lifetime-cap payment as if the refinance never happens. If that payment still fits a month you would recognize, the ARM is a discount you can survive. If it only fits because you assume you will refinance, you have bought a payment you cannot carry on the terms in the disclosure. Ask for the index, the margin, and each cap in writing, then have the loan officer compute the payment at the first adjustment using today's index and again at the lifetime cap. Compare that pair with the fixed quote on the same lock and the same points. A cheap ARM loaded with points is a different product from a par fixed loan.
The ARM fits a dated plan: a known move, a sale, or a payoff before month 61 on a 5/1. It fits poorly as a personality preference for a lower start rate. Fixed is the easier call when you do not know how long you will stay, or when a few hundred dollars more a month would cut something you care about. The break-even logic if you do refinance later is in when refinancing makes sense.
Sources: CFPB on fixed versus adjustable rates. Educational only. Product menus depend on credit, down payment, and lender.