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Adjustable Rate Mortgage, or ARM, loans can be used for buying a house or to refinance a current mortgage, and because of the upfront savings they offer, ARMs are a popular choice among first-time home buyers.

ARM Mortgage Overview

image of backyard patio | Adjustable Rate MortgageAn ARM, or Adjustable Rate Mortgage, is a variable rate mortgage. Unlike a Fixed Rate Mortgage, the interest rate on an ARM loan adjusts to the market after a set period, usually every year but sometimes on a monthly basis.  The change in the interest rate depends on the benchmark or index it is tied to plus the ARM margin. 

For example, a 7 Year ARM will adjust after the first 7 years of the loan. Since the initial interest rates and payments are lower than Fixed Rate Mortgages, many borrowers choose an ARM option as they offer savings up front.

When the fixed period is over and your rate adjusts, interest rates changes are capped.

There are typically two numbers used to express the types of Adjustable Rate Mortgage loans, for instance 10/1 and 5/1 ARM loans are commonly utilized by home owners.

The first number (“5” or “10”) applies to the number of years the particular loan interest rate is fixed, while the last number pertains to how often the rate changes during the remaining years left on the loan.

Use our mortgage calculator to estimate your monthly payments.

Adjustable Rate Mortgage Benefits

Many borrowers choose ARM loans because of the upfront savings they offer. With an initial interest rate and payments that are generally lower than fixed rate loans, ARM loans offer what many borrowers need:

  • Upfront savings: With the lower rate and payment in the initial period, you’re free to reach your financial goals with the money you would be using on a fixed rate loan
  • Initial fixed period: Enjoy the fixed, lower rate for the initial period
  • Cap on the amount you could pay: You won’t be taken by surprise because there are limits on the adjustment

Adjustable Rate Mortgages typically have rate caps built into them limiting how high the rate can be.  A periodic rate cap will limit how drastically the interest range can increase from one year to the next. Lifetime rate caps similarly limit how much the interest rate can go up during the life of the loan.

Adjustable Rate Mortgages benefit borrowers who:

  • Prefer a lower initial interest rate and payment
  • Move frequently
  • Expect to earn more income in a few years
  • Purchase, renovate, and resell properties
  • Plan to refinance before the loan adjusts
  • Have growing families and need a larger home in the future

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ARM Loan Requirements

  • As with any mortgage, your credit history will be considered before you can get qualified. A good place to get started is with a credit preapproval.
  • The loan amount for a conforming ARM loan is typically $484,350 but that limit may be higher in high cost regions.
  • Down payments for ARMs are usually the same as traditional loans, but there are loan types that allow for lower down payments.

Adjustable Rate Mortgages: What to Watch For

Borrowers need to be aware that their interest rate can increase once the initial fixed period ends. This comes as a surprise to many even though it is stipulated in the contract. You need to plan for this ahead of time—if your income has not increased in that time and you are unable to make your mortgage payments, you could face a serious issue.

Adjustable Rate Loan Options

ARM Loans can be used for:

FHA ARM, Jumbo ARM, and VA ARM loans feature an initial fixed rate period, after which the rate adjusts. All Adjustable Rate Mortgages adjust based on predetermined guidelines.

We offer a variety of terms:

  • 7 Year ARM - offers an initial fixed period of 7 years, then the rate adjusts. The 7 Year ARM is an option for Conventional and Jumbo loans.
  • 10 Year ARM - offers an initial fixed period of 10 years, then the rate adjusts. The 10 Year ARM is an option for Conventional and Jumbo loans.

Is an Adjustable Rate Mortgage a Bad Idea?

Although adjustable rate mortgages have many advantages, they may not be for everyone because:

  • Rising interest rates after initial fixed rate period may put a strain on personal finances.
  • Adjustable rates may make it difficult to plan long term.
  • Prepayment penalties may prevent borrowers from refinancing or selling.

How Often Does an Adjustable Rate Mortgage Adjust?

How often an adjustable rate mortgage adjusts depends on the specific conditions of the borrower’s loan. There are many types of ARMs that can adjust every month, every year, or after a predetermined fixed rate period.

Can Adjustable Rate Mortgage Rates Decrease?

Yes, the rate on an adjustable rate mortgage may decrease if certain conditions are met. This depends on falling interest rates bringing down the index to which the ARM is tied.

What Determines the Rate on an Adjustable Rate Mortgage?

The interest rate on an adjustable rate mortgage is determined by adding the index and the margin after an initial fixed rate period.

  • Index: a variable interest rate the ARM is tied to that reflects market conditions. It can be the Prime Rate or the rate on U.S. Treasury bills, for example.
  • Margin: the fixed percentage points a lender adds to the index to which the ARM is tied.

Can an Adjustable Rate Mortgage Be Refinanced?

Yes, adjustable rate mortgages can be refinanced. Refinancing an ARM can benefit borrowers who refinance before the interest rate on their ARM adjusts.

Do Adjustable Rate Mortgages Have Prepayment Penalties?

An adjustable rate mortgage may have a prepayment penalty if the borrower sells or refinances the ARM within a certain period of time.

Are There Rate Caps on Adjustable Rate Mortgages?

Adjustable rate mortgages may have rate caps that can limit how high the interest rate can go. These rate caps can affect the initial rate adjustment, periodic rate adjustments, or adjustments over the life of the loan.

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