Comparing Fixed and Adjustable Rate Mortgages



If you’re in the market for a new home, it pays — literally — to understand the difference between fixed rate and adjustable rate mortgages. In this guide to mortgage basics, we’ll explain the two basic types and explore the factors that determine which type will save you the most money.

Fixed Rate Mortgages

Fixed rate mortgages offer homeowners the security of knowing that their monthly mortgage payments will not change. That’s where this type of loan gets its name: fixed rate loans offer an interest rate that stays exactly the same during the life of the loan — whether the term is 15, 20 or 30 years. During the term, the only costs associated with the loan that might fluctuate are property taxes and mortgage insurance.

A 30-year fixed rate mortgage is one of the most popular choices for homebuyers. The length of this loan makes buying a home very affordable because it spreads mortgage payments out over many years, guaranteeing the lowest monthly payments possible with a fixed rate. There is, however, one main disadvantage to the 30-year fixed rate mortgage: the amount of interest the borrower pays. Because the borrower holds the loan for such a long time, he also ends up paying the bank a bigger fee (in the form of interest) for borrowing the money.

To understand how much interest is paid on a 30-year fixed loan, you have to look at an amortization schedule calculator. Amortization refers to a calendar that shows how loan principal and interest are repaid to the bank over time. Examine the amortization schedule for a 30-year fixed mortgage and you’ll see that monthly mortgage payments go mainly towards paying interest in the first few years of the loan. You don’t really start to chip away at the loan principal until many years into the loan.

What this means is that longer-term fixed rate mortgages cost more over time, while shorter-term fixed rate mortgages cost less because they force borrowers to repay the principal faster. When you agree to a fixed rate mortgage, you will also want to establish whether you will be allowed the option of paying the money back faster than required in order to lessen the amount of interest paid.

Adjustable Rate Mortgages

While the stability of a fixed rate mortgage is a serious selling point for many homebuyers, others are more concerned with getting the lowest interest rate possible. That’s what makes adjustable rate mortgages attractive.

Adjustable rate mortgages (usually called ARMs), have an interest rate that changes — typically once per year — in accordance with market conditions. The initial interest rate on an adjustable rate mortgage is set lower than that of a comparable fixed rate mortgage, but the rate typically (and historically) rises, over time.

It may seem like having an adjustable rate is a real gamble — and sometimes it can be. But there are limits on how often the rate can change, how high the rate can climb over the life of the loan, and how much it can change with each adjustment. These caps are determined by a borrower’s specific mortgage terms. Realize, however, that the interest rate for this type of loan can and likely will increase over time, so you must expect fluctuating payments over the life of the loan.

Fixed vs. Adjustable: Which One Is Right?

If you’re choosing between fixed and adjustable mortgages, you need to answer these four questions:

  • How long do I intend to live in my home?
  • Are interest rates predicted to rise or fall?
  • How large a mortgage payment can I afford right now?
  • Could I still afford an ARM if rates rise?

An ARM could be a great money-saving choice if you don’t plan to stay in a home for long, and if interest rates are low. But if interest rates are climbing and you plan on staying put, fixed rate could be the way to go.

No matter what home loan type you choose, it’s best to evaluate mortgage terms carefully so that you make a sound financial investment.


Greater Pensacola, FL Real Estate Experts – Making It Happen for Buyers and Sellers!

Grand Realty is a greater Pensacola real estate company that opened its doors in June of 2003. We strive to help all of our clients with their individual real estate needs, whether it’s buying a home in Pensacola FL and the surrounding area or selling their existing Pensacola property.

We have approximately 30 agents with a wide range of specialties that include:

  • Pensacola new home buyers
  • Pensacola short sales
  • Pensacola Foreclosures
  • Pensacola Investment properties
  • Pensacola commercial properties
  • Pensacola vacant land
  • Pensacola water front properties

Grand Realty is also proud to say we have agents who are bilingual, Spanish and Chinese that are placed throughout a good majority of Northwest Florida including Pensacola, Milton, Pace, Navarre, Perdido Key, Jay, Cantonment, Gulf Breeze, and Navarre. The Broker of Grand Realty is also licensed in Alabama. Please feel free to email or give us a call, and from everyone at Grand Realty, thanks for your business!

Grand Realty 3806 Hwy 90, Pace, FL 32571 Office Phone: 850-512-1185 Office Fax: 850-512-1195 Email:

Map of Pensacola, FL

View Larger Map