Fixed-Rate Mortgage vs. Adjustable-Rate Mortgage

Whether you are buying a home for the first time or moving up the property ladder, choosing a mortgage type is an important decision.

Once you sign on the dotted line, you are committed for the long term, so you need to know the rate you opt for is the right fit for your financial situation—both now and in the future.
It helps to understand the main differences between fixed-rate and adjustable-rate mortgages, as having the basics down will allow you to ask the right questions when it comes time to compare rates.

Comparison Basics

At a very basic level, the difference between a fixed-rate mortgage and adjustable-rate mortgage (ARM) is simple. The fixed-rate stays the same from the point the rate is set, whereas the adjustable-rate is subject to change throughout the mortgage.
Therefore, you know exactly where you are each month with your fixed-rate mortgage. With an ARM, your ability to predict how rates will change is limited by the predefined conditions of the loan and factors that influence the change in rates.

The initial rate you receive for an ARM is subject to going up or down after a fixed period. You may get lower rates at the beginning, which can remain fixed for as long as a few years before the adjustable-rate period begins.


An index dictates part of your rate, meaning the interest you pay may go up or down in line with the index. However, it is worth noting different ARMs may also set caps on how high or low your rates can go. When choosing a mortgage, it is important to take any caps into consideration when weighing up the pros and cons of each ARM.

Know Your ARM

An ARM shouldn’t mean all risk and no reward. You are entitled to ask about the upper rate and payments for each adjustment, and how they will affect your monthly payments. If your payments are expected to exceed your budget, you may want to shop around for a more suitable option.

The frequency of change is another important factor to consider. Even if your future budget may allow for the upper limit in adjustment, knowing when your payment is likely to increase, and how often, will allow you to ensure you can cope with the change.

Finding out about caps on either end of the equation will help you work out how far you can afford to stretch your budget. A lower rate is always welcome, but a limit on how high your rate can go will provide you with a safeguard when adjustments begin. If you can afford the maximum and all other factors are favorable, you may just have found the mortgage for you.

Risk Investment

You can never fully predict your future finances, so whether taking out a fixed-rate mortgage or an ARM, it is always better to base your decision on what you can afford now. Homeowners often take a risk by assuming the option to sell or refinance is always on the table. However, there is no guarantee the value of the property won’t decline or that you will remain in the same financial position indefinitely.

Fixed-Rate Pros vs. Cons

As fixed-rate mortgages do not change, there is a lot less risk, even though you may pay a higher rate on average. When you know your finances are unlikely to improve, you will have the peace of mind of knowing you can afford to keep up with your monthly rate. The problem with a fixed-rate mortgage is you get to watch as friends and family enjoying a lower rate when the index is in decline.

Budget Management

When it comes to your monthly budget, you need to be realistic about what you can afford. There is nothing wrong with tightening your purse strings, but you are playing a dangerous game if you underestimate your outgoings. It helps to keep receipts for everything you buy each month, so you have a better idea of how much you spend.

Check your utility bills and keep in mind energy costs change depending on the time of year. It is also important to remember that emergencies do come up from time to time, so choosing a rate that leaves you with no wiggle room in your budget will leave you in a precarious position if your budget is stretched.

At Galaxy Lending Group, we are committed to providing you with a mortgage option that is tailored to your personal needs. You will experience exceptional customer service throughout the process to help take the stress out of financing your new home. Call today or contact a team member through our online chat.