Arms VS Fixed Rates Most type of loans fall into two categories of loans – adjustable programs or fixed rate programs. The few loans that do not fall into these categories are usually a hybrid of them, with certain modifications.  A fixed rate is a loan that has a set interest rate. Regardless of what happens in the market place after the loan closes, the terms of your loan will not change. There are fixed rate loans... buy-downs, interest onlys and graduated payment plans  that will change in the early years of the loan, but these changes are fixed changes and are outlined in the mortgage note.  An adjustable, on the other hand, changes during the life of the loan. There are limits to how much or when it will change, but it does change. The rate that it changes to is determined by the economic conditions at the time of the change. Because of this, it is impossible to determine what your payments will be throughout the life of the loan. If used correctly, ARMS are not bad loans, . If you anticipate owning a home for less than 5 to 7 years, an ARM is a good choice. Choose a long term ARM like a 5/1 or a 7/1 and reap the benefits of the lower rate. This rate will stay fixed for the initial 5 or 7 years and by then you would have moved. If you are expecting a large increase in household income (perhaps the household will be going from a one person income to a two person income), the adjustable may be able to allow you to stretch into a slightly larger home or keep the payments down until the extra income starts. Finally, if you intend on paying down the loan substantially in the first 5 years, an ARM is a good choice. However, using an adjustable to “stretch” into a larger home when you do not anticipate major income adjustments would be a mistake. It might make your payment comfortable for the first few years, but in the end you will struggle.