Choosing the right mortgage can feel overwhelming, especially when interest rates are changing. 

One of the biggest decisions homebuyers face is whether to go with a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). 

In a falling rate environment, this decision becomes even more complex. Do you lock in a stable rate now, or take advantage of potentially lower rates down the road? 

Let’s break it down to help you decide what fits your financial goals and buying timeline.

Understanding the basics: adjustable vs. fixed-rate mortgages

Before comparing how these loans perform when rates drop, it’s important to understand how they work.

What is a fixed-rate mortgage (FRM)?

A fixed-rate mortgage offers a consistent interest rate for the entire term of the loan, usually 15, 20 or 30 years. 

That means your monthly principal and interest payments stay the same, no matter what happens in the market.

Best for: Homeowners who plan to stay in their homes for the long haul and value budgeting stability.

What is an adjustable-rate mortgage (ARM)?

An ARM starts with a lower fixed interest rate for a set period, commonly 5, 7 or 10 years. 

After that period ends, the rate adjusts annually based on an index in the financial markets, such as the SOFR (Secured Overnight Financing Rate), plus a margin.

Best for: Buyers planning to sell or refinance within the fixed period, or those comfortable with potential future rate changes.

How each loan type works in a falling rate environment

Falling interest rates can reshape the value each loan type offers. 

Here’s how each option plays out in a downward-trending rate market.

Fixed-rate mortgage in a falling rate market

A fixed-rate mortgage locks in your interest rate at the time of closing. This is helpful if you believe rates have bottomed out or may rise again in the future.

Pros:

• Locks in today’s rate for long-term stability
• Protects against future rate hikes
• Peace of mind from consistent monthly payments

Cons:

• If interest rates continue to fall, you’re stuck with a higher rate unless you refinance
• Closing costs for refinancing could offset potential savings

Adjustable-rate mortgage in a falling rate market

An ARM allows you to benefit more immediately and potentially longer from declining interest rates.

After the initial fixed period, your interest rate could adjust downward as long as rates continue to decline, reducing your payments.

Pros:

• Lower initial interest rate saves money early on
• Even lower rate possible if rates keep falling, meaning possibly lower payments after adjustment
• Great for short-term homeowners who may sell or refinance

Cons:

• Risk of rising rates after the initial period ends
• Monthly payments can fluctuate
• More complex terms and conditions to track

Which loan type is best for your situation?

Choosing between a fixed-rate and adjustable-rate mortgage depends on your personal goals, how long you plan to keep the home and your comfort with risk.

FRM may be best if:

• You plan to live in your home for more than 7 years
• You prefer predictable monthly payments
• You want to avoid future rate increases altogether

ARM may be best if:

• You expect to move, sell or refinance within 5–7 years
• You’re comfortable with market fluctuations after the fixed period
• You want to capitalize on lower introductory rates

Key pros and cons at a glance

How Get Committed® gives you an edge, no matter your choice

Whether you lean toward a fixed or adjustable-rate mortgage, Compass Mortgage offers a unique tool to strengthen your offer and reduce uncertainty: our distinctive Get Committed® program.

Get Committed® gives you a fully underwritten loan commitment even before you start house hunting. 

This allows you to:

• Lock in your interest rate early— prior to making an offer
• Compete with cash buyers, thanks to a fully vetted loan
• Avoid surprises during the financing stage
• Close faster, in as little as 15 days

In a falling rate environment, this means peace of mind no matter how you choose to structure your mortgage.

FAQ: Adjustable-rate mortgages and fixed-rate mortgages

Are adjustable-rate mortgages risky in today’s market?

ARMs can carry more risk than fixed-rate loans because your payments may increase once the interest rate adjusts. 

However, in a falling rate environment, they could lead to lower payments after the initial fixed period—especially if you’re planning to refinance or sell beforehand.

Can I refinance from an ARM to a fixed-rate loan later?

Yes, refinancing is a common strategy. If rates drop significantly or you want long-term stability, refinancing from an ARM to an FRM may make sense.

How long should I plan to stay in a home to make a fixed-rate mortgage worth it?

Generally, if you plan to stay in your home for more than 7 years, a fixed-rate mortgage provides cost stability and predictability that can outweigh initial savings from an ARM.

What happens if rates rise after I take out an ARM?

After the fixed period ends, your rate could increase with the market. ARMs have rate caps to limit how much your interest rate can rise annually and over the life of the loan, but your monthly payment could still go up significantly.

How can I protect myself from rate changes with an ARM?

Consider choosing an ARM with a longer initial fixed period (e.g., 10 years), understand the rate caps and explore programs like Compass Mortgage’s Get Committed®, which allows you to lock in your rate early.

Match your mortgage to your moment

A falling rate environment offers opportunities, but choosing the right mortgage depends on how long you plan to own the home and how comfortable you are with future rate changes: 

• FRMs offer long-term consistency. 
• ARMs offer short-term savings with long-term uncertainty.

Either way, Compass Mortgage is here to simplify the process and provide personalized guidance. Our loan officers combine expert advice with streamlined technology to make your experience smooth from start to finish.

Apply with Compass Mortgage now or call us at (877) 635-9795 to speak with a knowledgeable loan officer today. 

Let us help you choose the mortgage that fits your life—now and into the future.