A fixed-rate mortgage has an interest rate that stays the same for the life of the loan. An adjustable-rate mortgage, known as an ARM, has an interest rate that can change over time. The difference decides whether a borrower’s rate can move after the loan begins. The Consumer Financial Protection Bureau (CFPB) explains the two types on its website.

How a fixed-rate mortgage works

According to the CFPB, the interest rate on a fixed-rate mortgage is set when the loan is taken out and will not change. Federal Reserve Consumer Help says the same thing in other words: the rate is locked in for the duration of the loan.

The lender establishes the rate according to the terms of the loan contract or note, the Federal Reserve says. The Federal Reserve sets a target for the “federal funds rate,” the rate at which depository institutions lend balances overnight to one another. The Federal Reserve says that target does not directly affect the interest rate on a home mortgage.

How an adjustable-rate mortgage works

The CFPB says the interest rate on an ARM may go up or down. Many ARMs start at a lower rate than fixed-rate mortgages. That starting rate may hold steady for months, for a year, or for a few years.

Once that opening period is over, the rate is adjusted at regular intervals, and the payment is likely to go up, according to the CFPB. Part of the rate is tied to an index, which is a broader measure of interest rates. The lender adds a margin, a set number of percentage points, to the index. The resulting rate is subject to any caps in the loan.

The payment goes up when the index rises. When interest rates decline, the payment may sometimes go down, the CFPB says, but that is not true for all ARMs.

Caps on ARM rate changes

The CFPB says ARMs typically include several kinds of caps. These control how far the rate can move up or down. The figures below come from a CFPB page last reviewed Jan. 14, 2025, and the agency describes them as common, not required.

An initial adjustment cap applies the first time the rate changes, after the fixed-rate period ends. The CFPB says it is common for this cap to be two or five percentage points above or below the starting rate. A subsequent adjustment cap applies to the periods that follow. It is most commonly one or two percentage points above or below the previous rate.

A lifetime adjustment cap limits the total change over the life of the loan. The CFPB says it is most commonly five percentage points above or below the initial rate, though some loans have a higher cap. Some loans set a different lifetime limit for decreases than for increases. The CFPB calls that lower limit a floor.

What the sources say about cost and limits

On cost, the CFPB says the rate on a fixed-rate loan is set when the loan is taken out and does not change. For an ARM, the CFPB says the starting rate is often lower than on a fixed-rate loan, but the payment is likely to rise once the introductory period is over. The sources give no other cost figures for either type.

On limits, a fixed-rate loan’s rate cannot change. An ARM’s limits come from its caps and its adjustment schedule. The CFPB lists points to find out before taking out an ARM. They include how high or low the rate and payment can go with each adjustment, how often the rate adjusts, how soon the payment could go up, and whether the loan would still be affordable at the maximums the contract allows.

The CFPB says a lender can calculate the highest payment possible on a given loan. That figure can also be found on the Loan Estimate or the Truth-in-Lending disclosure. The CFPB says lenders are required to provide these within three business days after an application.

Where the rate terms are written

Federal Reserve Consumer Help says the loan documents received at closing must state the interest rate and whether it will change. Where a change is possible, the documents must also state when changes will occur and how they are calculated. The loan contract or note with the lender shows how the lender determines changes.

If the rate information cannot be found in the loan documents, the Federal Reserve says to call the lender. Contact details are usually on the monthly statement or in the payment book.