Fixed Rate Mortgages vs Adjustable Rate Mortgages

My name is Evan Kaufman, your VA loan originator, here to help explain fixed rate vs ARMs.

When you hear “fixed rate” versus an “ARM” (adjustable rate mortgage), what is really the difference between the two?

Well, a fixed-rate mortgage is simply that—you have fixed the rate of the loan for the life of the loan.

So, you might have heard, “Oh hey, I got a 30-year mortgage, or a 15-year mortgage and it’s fixed.”

That means for that full term of the loan—be it 15 or 30 years, or really anywhere in between (we can do like a 21- or 22-year mortgage if you want)—the rate is fixed for the whole time.

An ARM simply means an adjustable-rate mortgage.

The concept there is that your rate will actually adjust over the life of the mortgage.

So, if you ultimately—let’s say for ARMs—the key is to understand what your time frame is for it to potentially adjust. It could be something like a 3, 5, or 7-year ARM. That means after three years, your rate will be X, but then at the three-year mark, your rate could adjust upward by so many percentage points, as stated in the loan documents.

One thing to note is that, typically, if it’s a conforming loan, you should have a fixed ceiling as to how far that mortgage rate can actually go up at those intervals.

If you don’t, it could be the Wild West—that’s what happened in 2008 and 2009, with things blowing up because there really were no restrictions on how far a rate could go up.

But ARMs today typically have restrictions on how much rates can actually increase at those intervals over the term of the loan.

So, are ARMs really that bad? Upfront, I would say they’re not usually as ideal as a fixed-rate mortgage because with a fixed rate, if the world blows up or something happens, at least you know what your payment is going to be consistent.

Some people still like ARMs because, in the short term, they can be somewhat beneficial.

However, if we’re in an environment like we are now (as of shooting this video in 2024), there’s what’s called an inverted yield curve, where, weirdly, short-term interest rates tend to be the same or even worse than long-term interest rates.

So, over the last couple of years, ARMs—adjustable-rate mortgages—really haven’t been a much better deal than fixed-rate mortgages.

Typically, you’d have it where ARMs would have a lower interest rate than a fixed rate, but there’s the risk of it adjusting later on.

Lately, ARMs have been the same or even higher than fixed rates, so it’s made ARMs a no-brainer not to do.

But as that inverted yield curve starts to change—which is very possible in the future—then, all of a sudden, if ARMs start having significantly better interest rates than fixed-rate mortgages, there could be scenarios where an ARM might make sense again.

Personally, I might still recommend a fixed rate so you have certainty, just in case something happens.

But I know even from personal experience, if you know you’re going to pay that debt off—let’s say in the next few years, you’re getting really aggressive with it, or you know some money is coming from somewhere, and you’re going to try to knock it out—whatever the case, if you plan to pay it off in 3, 5, or 7 years, then an ARM might give you a better rate for that period.

And if you’re trying to pay it off quickly, you might actually come out ahead because it was a lower interest rate than a fixed-rate mortgage.

However, if something goes wrong in that payoff plan, be ready—because when it comes time for the rate to adjust, it could have a negative impact if rates happen to go up when that adjustable-rate mortgage portion kicks in.

So, are ARMs bad?

I would say, hey, be cautious of them.

Whenever you hear someone saying, “Hey, maybe you should consider doing an ARM,” you just want to be really careful about what you’re getting into because there are some extra variables there that you don’t usually have to worry about with a fixed-rate mortgage.

Over the last few years, by most standards, the fixed rate has been the no-brainer option.

However, if rates start to normalize, and bond markets overall kind of normalize, we could see ARMs, those adjustable-rate mortgages, start to have better and better rates.

But it’s still for the short term.

So, it’s really important to work with a lender who can help walk you through that and explain what you’re seeing.

I hope this helped explain a little bit about the difference between fixed-rate and adjustable-rate mortgages.

And remember, the relationship between the two might change in the future.

It’s always in flux, depending on what the overall mortgage market is doing.

My name is Evan Kaufman, your VA loan originator, here to help explain. Take care!