Fixed or adjustable, 15 or 30 years: what actually changes

Fixed rate: the payment you sign is the payment you keep

A fixed-rate loan sets the interest rate at closing and holds it for the life of the loan. Your principal-and-interest payment is the same in year one and year thirty; only the taxes and insurance collected with it can change. That predictability is the reason most Maryland buyers choose it, and why it is the reference point for every other option.

The tradeoff is that a fixed rate is usually a little higher than an ARM’s starting rate, because the lender is taking the risk that rates rise. If rates fall later, you can look at a refinance, which has its own costs; the refinance guide on this site walks through that math.

How an ARM adjusts: index, margin, and caps

An adjustable-rate mortgage starts with a fixed rate for a set period, commonly 5, 7, or 10 years, and then adjusts on a schedule, often every six months or every year. The CFPB explains that the new rate is an index, a broad measure of market interest rates, plus a margin the lender adds, subject to caps. When the index rises, your payment goes up; when it falls, your payment may go down, but not with every ARM.

Caps limit how much the rate can change at the first adjustment, at each later adjustment, and over the life of the loan. A loan described as 5/6 with caps of 2/1/5 means five fixed years, adjustments every six months after that, a maximum 2-point jump at the first change, 1 point at each later change, and 5 points above the start rate in total. Those numbers are on your Loan Estimate and in the CFPB’s ARM handbook that lenders must give you.

The number that matters: the worst-case payment

The CFPB’s advice is direct: do not assume you will sell or refinance before the rate changes, because your home’s value or your finances could change, and if you cannot afford the higher payments on today’s income you may want a different loan. Ask your loan officer for the payment at the lifetime cap, and decide with that number, not with the introductory one.

An ARM can make sense when you are confident you will move or pay the loan off inside the fixed period, or when the starting rate is far enough below the fixed alternative that the savings are real even if you stay. It is a bet on time; make it on purpose.

15, 20, or 30 years: the term changes the payment and the total interest

The term is how long you have to repay. A 30-year loan has the lowest required payment; a 15-year loan has a much higher payment, usually a somewhat lower rate, and far less total interest because you are borrowing the money for half the time. A 20-year term sits in between.

Most Maryland buyers take the 30-year term for the flexibility and pay extra toward principal when they can, which shortens the loan without locking in the higher payment. Ask whether the loan has a prepayment penalty before you count on that; the Loan Estimate says so on page one.

• Compare the total interest over the life of each term, not only the monthly payment.
• A 30-year loan with voluntary extra payments keeps the lower required payment as a safety valve.
• A shorter term only helps if the higher payment fits comfortably in your budget every month.

How to tell what you have, and what to ask for

If you already have a mortgage and are not sure, the CFPB explains where to look: your note and your Closing Disclosure state whether the rate can change and when. Converting an ARM to a fixed rate is one of the common reasons for a refinance in Maryland.

If you are buying, ask your loan officer for a Loan Estimate for the fixed option and for any ARM being suggested, on the same loan amount, and compare the payment, the lifetime maximum payment, the APR, and the costs. In Maryland, Paola runs that comparison at New Priority Lending Corp.; nothing on this page selects a loan for you.