How Mortgage Interest Works: Fixed vs Adjustable Rates

Understand the difference between fixed-rate and adjustable-rate mortgages and how interest affects your payments.

How Mortgage Interest Works

When you take out a mortgage, your monthly payment consists of two parts: principal (paying down what you borrowed) and interest (the cost of borrowing). In the early years, most of your payment goes toward interest.

Fixed-Rate Mortgages (FRM)

With a fixed-rate mortgage, your interest rate stays the same for the entire loan term. This means predictable monthly payments. Most homeowners choose 15-year or 30-year fixed-rate mortgages.

Adjustable-Rate Mortgages (ARM)

ARMs start with a lower interest rate that adjusts periodically based on market rates. A 5/1 ARM means the rate is fixed for 5 years, then adjusts annually. ARMs can save money short-term but carry long-term uncertainty.

How Interest Rate Affects Your Payment

On a $350,000 30-year mortgage: at 6% your monthly payment is ~$2,098; at 7% it's ~$2,328. That 1% difference costs an extra $83,000 over the life of the loan.