A fixed-rate mortgage keeps its note rate unchanged for the term; an adjustable-rate mortgage (ARM) can change after its initial fixed period under its index, margin, and caps. A 5/1 ARM can begin with a lower payment yet become materially more expensive when the first adjustment arrives.
fixed rate vs adjustable rate mortgage: the measured relationship
A fixed-rate mortgage has a rate set for the loan term, while an ARM has an initial fixed-rate period followed by contract-defined adjustments. A 15-year versus 30-year choice changes the repayment term. This choice changes whether the rate itself can move after closing.
| Original balance | $300,000 |
|---|---|
| Initial rate | 5.50% per year |
| First-reset cap | 2 percentage points |
| Illustrated reset | 7.50% per year |
| Illustrated payment change | about $514 per month |
fixed rate vs adjustable rate mortgage: a worked dollar case
On a $300,000 balance amortized over 30 years, 5.50% produces about $1,703 principal and interest each month. If a 5/1 ARM's first adjustment cap is 2 percentage points, its 5.50% rate could be as high as 7.50% at the first reset. With 25 years remaining, 7.50% produces about $2,217 per month, about $514 more; the contract sets the real outcome.
fixed rate vs adjustable rate mortgage: calculation method
For an ARM reset, fully indexed rate equals the named index plus fixed lender margin, then the note's periodic and lifetime caps apply. Recalculate from the remaining balance and remaining term, not the original balance.
fixedratevsadjus related calculations: fixed-payment scenario; remaining balance schedule; monthly payment comparison.
Audit the Fixed-rate vs. adjustable-rate mortgage: what risk are you taking? scenario
fixedratevsadjus timing check. Record Original balance as $300,000. fixedratevsadjus timing review changes Initial rate to 5.50% per year and keeps the unit beside the figure. A fixedratevsadjus timing comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus cash-flow check. Record Initial rate as 5.50% per year. fixedratevsadjus cash-flow review changes First-reset cap to 2 percentage points and keeps the unit beside the figure. A fixedratevsadjus cash-flow comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus rate check. Record First-reset cap as 2 percentage points. fixedratevsadjus rate review changes Illustrated reset to 7.50% per year and keeps the unit beside the figure. A fixedratevsadjus rate comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus balance check. Record Illustrated reset as 7.50% per year. fixedratevsadjus balance review changes Illustrated payment change to about $514 per month and keeps the unit beside the figure. A fixedratevsadjus balance comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus disclosure check. Record Illustrated payment change as about $514 per month. fixedratevsadjus disclosure review changes Original balance to $300,000 and keeps the unit beside the figure. A fixedratevsadjus disclosure comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus schedule check. Record Original balance as $300,000. fixedratevsadjus schedule review changes Initial rate to 5.50% per year and keeps the unit beside the figure. A fixedratevsadjus schedule comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus threshold check. Record Initial rate as 5.50% per year. fixedratevsadjus threshold review changes First-reset cap to 2 percentage points and keeps the unit beside the figure. A fixedratevsadjus threshold comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus payment check. Record First-reset cap as 2 percentage points. fixedratevsadjus payment review changes Illustrated reset to 7.50% per year and keeps the unit beside the figure. A fixedratevsadjus payment comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus property check. Record Illustrated reset as 7.50% per year. fixedratevsadjus property review changes Illustrated payment change to about $514 per month and keeps the unit beside the figure. A fixedratevsadjus property comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus income check. Record Illustrated payment change as about $514 per month. fixedratevsadjus income review changes Original balance to $300,000 and keeps the unit beside the figure. A fixedratevsadjus income comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus insurance check. Record Original balance as $300,000. fixedratevsadjus insurance review changes Initial rate to 5.50% per year and keeps the unit beside the figure. A fixedratevsadjus insurance comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
fixedratevsadjus term check. Record Initial rate as 5.50% per year. fixedratevsadjus term review changes First-reset cap to 2 percentage points and keeps the unit beside the figure. A fixedratevsadjus term comparison recalculates the stated relationship from those two dated inputs, instead of reusing a rounded intermediate amount.
Keep a decision record
fixedratevsadjus timing record. The fixedratevsadjus worksheet pairs First-reset cap (2 percentage points) with Illustrated reset (7.50% per year). A fixedratevsadjus timing decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus timing source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus cash-flow record. The fixedratevsadjus worksheet pairs Illustrated reset (7.50% per year) with Illustrated payment change (about $514 per month). A fixedratevsadjus cash-flow decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus cash-flow source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus rate record. The fixedratevsadjus worksheet pairs Illustrated payment change (about $514 per month) with Original balance ($300,000). A fixedratevsadjus rate decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus rate source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus balance record. The fixedratevsadjus worksheet pairs Original balance ($300,000) with Initial rate (5.50% per year). A fixedratevsadjus balance decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus balance source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus disclosure record. The fixedratevsadjus worksheet pairs Initial rate (5.50% per year) with First-reset cap (2 percentage points). A fixedratevsadjus disclosure decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus disclosure source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus schedule record. The fixedratevsadjus worksheet pairs First-reset cap (2 percentage points) with Illustrated reset (7.50% per year). A fixedratevsadjus schedule decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus schedule source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus threshold record. The fixedratevsadjus worksheet pairs Illustrated reset (7.50% per year) with Illustrated payment change (about $514 per month). A fixedratevsadjus threshold decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus threshold source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus payment record. The fixedratevsadjus worksheet pairs Illustrated payment change (about $514 per month) with Original balance ($300,000). A fixedratevsadjus payment decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus payment source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus property record. The fixedratevsadjus worksheet pairs Original balance ($300,000) with Initial rate (5.50% per year). A fixedratevsadjus property decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus property source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus income record. The fixedratevsadjus worksheet pairs Initial rate (5.50% per year) with First-reset cap (2 percentage points). A fixedratevsadjus income decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus income source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus insurance record. The fixedratevsadjus worksheet pairs First-reset cap (2 percentage points) with Illustrated reset (7.50% per year). A fixedratevsadjus insurance decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus insurance source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
fixedratevsadjus term record. The fixedratevsadjus worksheet pairs Illustrated reset (7.50% per year) with Illustrated payment change (about $514 per month). A fixedratevsadjus term decision tests the effect of that pair before adding another assumption. Keep the fixedratevsadjus term source document with the result, because a revised statement, disclosure, assessment, or account term changes the input rather than the arithmetic.
Common mistakes in Fixed-rate vs. adjustable-rate mortgage: what risk are you taking?
Do not call a 5/1 ARM a five-year loan, or use the introductory rate as a lifetime rate. Check adjustment timing, index, margin, floor, and caps in the disclosure.
Where this calculation stops
This illustration does not predict the index, property taxes, insurance, refinance availability, or income. Payment caps and negative-amortization features differ by contract.
fixed rate vs adjustable rate mortgage: source check
The Consumer Financial Protection Bureau explains that an ARM's post-introductory rate is index plus margin subject to caps, and advises checking how high the payment can go. Read the named source. The fixedratevsadjus record should be reconciled to the disclosure, statement, tax bill, or agreement that governs that exact transaction.
fixed rate vs adjustable rate mortgage: using the output
The fixedratevsadjus output keeps each input's named unit and date adjacent to the result. Update the fixedratevsadjus scenario when its rate, balance, payment, or property value changes.