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Fixed vs Adjustable Rate Mortgages

A fixed-rate mortgage locks your interest rate for the entire loan term, typically 15 or 30 years. Your monthly principal and interest payment never changes, making budgeting predictable. A 30-year fixed keeps payments low but costs significantly more in total interest: on a $300,000 loan at 6.5%, you'll pay roughly $382,000 in interest over 30 years versus $139,000 over 15. The 15-year saves $243,000 but requires a monthly payment about 40% higher.

An adjustable-rate mortgage (ARM) starts with a fixed period — commonly 5, 7, or 10 years — then adjusts annually based on a benchmark index. A 7/1 ARM fixes your rate for 7 years, then adjusts each year after. ARMs typically start lower than fixed rates, which reduces early payments, but carry the risk of rising when the fixed period ends. They suit buyers who plan to sell or refinance within the fixed window.

Understanding APR vs Interest Rate

The interest rate is what the lender charges on the principal balance. The Annual Percentage Rate (APR) includes the interest rate plus fees — origination charges, discount points, and some closing costs — expressed as a yearly rate. APR is always higher than the interest rate and is the better number to compare across lenders, since it reflects the true cost of borrowing. A lender advertising 6.25% with high fees may cost more than one advertising 6.5% with no fees.

The Mortgage Payment Formula

A fixed-rate loan uses a standard amortization formula, so every payment is identical in amount even though the principal-and-interest split changes over time:

M = P × [i(1 + i)ⁿ] ÷ [(1 + i)ⁿ − 1]

where M is the monthly payment, P is the loan amount, i is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (years × 12). This payment covers principal and interest only — property taxes, homeowners insurance, and PMI are added on top by your lender as escrow.

A Worked Example

Take a $300,000 loan at 6.5% for 30 years. The monthly rate is 0.065 ÷ 12 = 0.005417 and there are 360 payments:

M = 300,000 × [0.005417 × (1.005417)³⁶⁰] ÷ [(1.005417)³⁶⁰ − 1] ≈ 300,000 × 0.006321 ≈ $1,896 per month

In your first payment, about $1,625 goes to interest and only $271 to principal. Over the full 30 years you pay roughly $382,000 in interest. The same loan at 6% drops to about $1,799 per month and $347,515 in total interest — a 0.5 percentage point difference worth about $34,500.

Mortgage Points: Are They Worth It?

One discount point costs 1% of the loan amount and typically lowers your rate by 0.25%. On a $300,000 mortgage, one point costs $3,000 and might reduce your rate from 6.5% to 6.25%, saving about $47 per month. Your break-even is $3,000 ÷ $47 = 64 months (about 5 years). If you plan to stay longer than 5 years, buying points makes sense. If you might move or refinance sooner, it doesn't. Use the amortization table to see how different rates affect total interest paid.

How Much Should You Put Down?

A 20% down payment avoids Private Mortgage Insurance (PMI), which typically adds 0.5–1% of the loan amount annually to your payments. Below 20%, PMI protects the lender, not you, until you reach 20% equity. On a $300,000 home, PMI could cost $125–$250 per month. That said, saving to 20% while renting often costs more than paying PMI, depending on local rent levels and home price growth. Run the numbers for your market using the Rent vs Buy calculator alongside this one.

Reading the Amortization Table

In the early years of a 30-year mortgage, most of each payment goes toward interest. On a $300,000 loan at 6.5%, your first payment of roughly $1,896 splits as $1,625 interest and only $271 principal. By year 15, the split is closer to half and half. By year 25, most goes to principal. This is why extra payments made early have an outsized effect: they eliminate future interest on that principal for the remaining loan term. Even one extra payment per year on a 30-year mortgage can shorten it by 4–5 years.