Fixed vs adjustable-rate mortgages

Fixed-rate and adjustable-rate mortgages are two types of mortgages that describe how your loan’s interest rate may remain constant or change over time. As you research, it’s important to understand how each loan type impacts your payments and decide what works best for you.

Fixed-rate mortgages

With a fixed-rate mortgage, the principal and interest portion of your monthly mortgage payment stays the same over the life of your loan.

• Fixed-rate mortgages provide stability and predictability, helping protect you from rising interest rates.
• These loans may start with a higher interest rate than an adjustable-rate mortgage, which could create higher initial payments.
• A fixed-rate mortgage may be a good option if you plan on staying in your home long-term and prefer consistent payments.

Keep in mind that even with a fixed-rate mortgage, your overall monthly payment may still change if it includes escrow. Costs such as property taxes and homeowners insurance can fluctuate over time and may affect your total monthly payment.

Adjustable-rate mortgages (ARMs)

An adjustable-rate mortgage (ARM)  starts with a fixed interest rate during a temporary introductory period (typically 5, 7, or 10 years). After this period is over, the interest rate will periodically change as the market fluctuates.

• Adjustable-rate mortgages are riskier than fixed-rate mortgages, as changing interest rates can make your monthly payments fluctuate up or down. 
• ARMs offer an initially lower interest rate during the introductory period, which may lower your initial monthly principal and interest payment.

An ARM may be a good option if you plan to move or refinance your loan before the introductory period ends.

Your mortgage interest rate represents the cost you pay to borrow money from a lender. It affects how much interest is included in your monthly mortgage payment.

An annual percentage rate (APR) goes a step further by showing the overall cost of the loan. APR includes your interest rate plus certain upfront and ongoing costs of getting the loan, such as discount points, lender fees, and other charges.

How APR can differ by loan type:

• Fixed-rate mortgages: Because the interest rate and monthly principal and interest payments stay the same over the life of the loan, the APR typically stays the same as well.
• Adjustable-rate mortgages (ARMs): Since the interest rate and monthly payment can change over time, the APR may also change. Keep in mind that APR does not show the highest interest rate your loan could reach.

Understanding the difference between your interest rate and APR can help you better understand what you’re paying for, compare loan offers more accurately, and feel more confident about the total cost of your mortgage.

Mortgages offer different loan terms, which refer to how long you have to repay your mortgage balance. The length of your loan term affects both your monthly payment amount and the total interest you may pay over time. Shorter loan terms come with higher monthly payments, but typically lower interest rates and less total interest paid over the life of the loan. Longer loan terms come with lower monthly payments, but often higher interest costs over time compared to shorter-term loans.

How terms work by loan type:

• Fixed-rate mortgages: The most common loan terms for a fixed-rate mortgage are 30 years and 15 years. The shorter your loan term, the faster you can pay off your home.
• Adjustable-rate mortgages: ARMs typically have 30-year terms. ARMs have different introductory periods where the interest rate is fixed. When shopping for an ARM, you’ll see loans with two numbers in front: the first notes the length of the introductory period, and the second number notes when the loan will adjust. For example, a 5/6 ARM means the rate is fixed for five years, then adjusts every six months.

Homebuyers often ask how housing prices and mortgage interest rates affect each other. Typically, as one amount goes up, the other will go down; but this is a guideline rather than a rule, as the markets are constantly changing.

• When interest rates rise, sellers may lower prices as housing demand falls. When interest rates are lower for buyers, sellers may inflate prices as housing demand rises.
• As a buyer, your home’s price will help determine how much you should save for your down payment. The standard is 20% of the home’s price, but programs are available that require lower percentages.
• To start budgeting for your monthly payments after closing, you will need to know how your home’s price, your down payment, and your mortgage interest rate come together, as well as any required escrow funds for items like taxes, mortgage insurance, or flood insurance. Be sure to talk with your lender so you know what’s expected at closing and for ongoing payments.

Ultimately, the “right” mortgage looks different for every borrower. You will select your mortgage based on your personal financial situation and broader factors outside your control that influence mortgage rates.

• Personal finances : Factors such as your credit score and loan-to-value ratio (LTV) may impact what mortgage rate options are available. If you have a good credit score or LTV, you may qualify for lower mortgage interest rates.
• Market factors : Inflation, various economic growth indicators, Federal Reserve policy, the bond market (especially 10-year treasury notes), and housing market conditions all influence mortgage interest rates.

Knowing the benefits and drawbacks of both fixed-rate and adjustable-rate mortgages can help you decide which mortgage works best with your situation and overall goals. Shop for mortgage rates by researching different lenders and comparing different loans and APRs. Review Wells Fargo’s mortgage rates and talk to a home mortgage consultant today to see what options are available.

If you extend your loan term, you may pay more interest over the life of your loan.

If you are a service member on active duty, an eligible spouse, partner, or dependent, or currently receiving SCRA benefits, please consult with your legal advisor prior to seeking a refinance of your existing mortgage loan. In some cases, a refinance may impact your eligibility for benefits under the Servicemembers Civil Relief Act or applicable state law.