Fixed Rate vs ARM Mortgage: Which Saves More?

A fixed-rate mortgage locks your rate for 30 years — certainty in exchange for a higher initial rate. A 5/1 ARM fixes the rate for 5 years then adjusts annually. In 2026, a 30-year fixed averages ~6.75% while a 5/1 ARM runs ~5.9% — a 0.85% difference that saves ~$280/month on a $400K loan.

Over the first 5 years, an ARM saves ~$16,800 in interest. The risk: if rates are higher in year 6, your payment jumps. A 5/1 ARM typically has a 2% annual cap and 5% lifetime cap — meaning a 5.9% ARM could reach 10.9% at worst. At 10.9%, your payment would be ~$3,800/month vs $2,620/month fixed — a $1,180/month increase that could strain budgets.

ARMs make sense if: (1) you plan to sell before the fixed period ends, (2) you expect rates to fall and will refinance, or (3) you have significant income flexibility to absorb rate increases. Fixed rates make sense if: (1) you plan a 10+ year hold, (2) your budget is tight, or (3) you value certainty over optimization.

In 2026, with rates elevated vs 2020–2021 lows, many buyers expect rates to fall. An ARM may be especially attractive if you believe rates will drop 1–2% in the next 5 years — potentially letting you refinance into a fixed rate lower than today's fixed options.