Homebuyers

Are Adjustable-Rate Mortgages a Smart Option for First-Time Homebuyers?

You found the home. You’ve got the down payment ready. But there’s one more obstacle: mortgage rates.

A high mortgage interest rate can increase the size of your monthly housing payment. It’s a big concern for all homebuyers, especially first-time buyers on limited budgets.

Enter the adjustable-rate mortgage (ARM). These home loans typically offer a lower initial rate that could lower the first years of mortgage payments, making them more manageable.

But after the introductory period, the mortgage rate will adjust to current rates up to a certain cap. So, is getting an ARM a smart move for homebuyers?

“In today’s market, it’s probably never been a more obvious time in my mortgage career to take the ARM,” said Raymond Williams, executive vice president of Consumer Direct at New American Funding.

That’s because rates for ARM rates are often substantially lower than rates for 30-year, fixed-rate loans.

If you’re considering an ARM, here’s what you need to know.

How ARMs work

An ARM starts with a fixed interest rate for a set number of years, often five, seven, or 10. After that initial period, the rate adjusts every six months or a year based on the current market conditions, up to a certain cap.

You’ll often see ARM products listed as two numbers. The first number is the number of years the rate stays fixed. The second shows how often it adjusts after that, for the remainder of the loan term.

When shopping ARMs, you’ll commonly see these three term structures:

• 5/1 ARM: Rate is fixed for five years, then adjusts once a year
  
  
• 7/1 ARM: Rate is fixed for seven years, then adjusts once a year
  
  
• 7/6 ARM: Rate is fixed for seven years, then adjusts every six months

Those adjustments are tied to a market benchmark, typically the Secured Overnight Financing Rate (SOFR), plus a fixed margin set by your lender.

Rate adjustments are the biggest concern many borrowers have with ARMs. However, most ARMs include rate caps to protect you from unlimited increases.

Many of these loans have a lifetime adjustment cap of five percentage points, according to the Consumer Financial Protection Bureau (CFPB.) This means the rate on your loan can’t rise or fall by more than five percentage points.

Make sure you understand the cap structure of any ARM before signing.

How much can you save with an ARM?

The main benefit of an ARM is the savings it can provide compared to a fixed-rate mortgage.

“Historically, ARMs often start somewhere from a half a percentage point to a full percentage point lower than comparable fixed mortgages,” said Alex Beene, a financial literacy instructor at the University of Tennessee at Martin. “On a typical starter home loan, that can equate to hundreds of dollars in monthly savings and potentially thousands per year during the fixed period.”

For example, the median U.S. home sale price was just over $400,000 in the fourth quarter of 2025, according to  U.S. Census Bureau and U.S. Department of Housing and Urban Development data.

Someone who scored a loan 5.2% rate on a $400,000 home with 20% down could save about $200 compared to someone with a 6.2% rate on the same home.

“You’ve got a lower monthly payment, it’s easier to qualify [for a mortgage] because your payment is lower and your debt is lower,” said Williiams. “Or the other way around, you can afford a more expensive house.”

Before signing, use a mortgage calculator to run the numbers on any loan you're considering to make sure the mortgage makes sense for you.  

Which homebuyers are ARMs best for?

ARMs are generally best for buyers who plan on refinancing or selling their homes before the fixed period ends. They can also work well for borrowers who expect their financial situation to improve before the rate adjusts.

ARMs can also be a viable option for buyers who would not otherwise be financially able to purchase a home.

“Adjustable-rate mortgages offer a lower initial rate than a 30-year fixed mortgage,” said Nadia Evangelou, principal economist at the National Association of Realtors (NAR). “This can reduce the monthly payment in the early years and especially help first-time buyers qualify and purchase a home sooner.”

The share of first-time homebuyers dropped to a record low of 21% in 2025, according to NAR. Yet only 4% of those buyers chose an ARM.

That said, you should only opt for an ARM if you have a strong understanding of the risks and a solid plan to address them.

Are ARMs risky home loans?

For all their benefits, ARMs also come with risks that homebuyers should consider. If rates rise and your monthly payment increases, it could strain your budget.

While many mortgage professionals expect rates to go down in the coming years, nothing is certain. Most borrowers plan to refinance or sell before the fixed period ends. But that’s not always possible.

“In that situation, the borrower could face a significantly higher monthly payment after the adjustment period,” said Beene.

Williams said that today’s ARMs aren’t what they used to be.

“Today’s ARMs are very predictable, very slow to rise,” said Williams. “And you’re fully provided with the paperwork upfront about how they adjust, when they adjust, and what the caps are.”

Raymond Williams NMLS # 270010