An Adjustable-Rate Mortgage (ARM) offers an initial fixed-rate period followed by periodic interest rate adjustments. With lower introductory rates compared to traditional fixed-rate loans, ARMs can provide significant savings for homebuyers planning to move, refinance, or pay off their mortgage before the rate adjusts. Learn how an ARM could be the right financing option for you.
An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate remains fixed for an initial period, typically between five and ten years, before adjusting at predetermined intervals based on market conditions. Unlike fixed-rate mortgages, where the interest rate stays the same throughout the loan term, ARMs have an adjustable component that fluctuates based on a financial index such as the Secured Overnight Financing Rate (SOFR) or U.S. Treasury rates.
Homebuyers looking for lower initial mortgage payments can benefit from an ARM, especially if they plan to sell or refinance before the interest rate begins adjusting. Borrowers who anticipate an increase in income over time may also find ARMs beneficial, as they provide lower monthly payments in the early years of homeownership. Investors and those purchasing properties in high-cost areas often use ARMs to take advantage of the lower starting interest rates.
An ARM consists of two phases: the fixed-rate period and the adjustment period. During the initial fixed-rate period, the interest rate remains constant, offering predictable payments. After this period ends, the interest rate adjusts at specified intervals, typically once a year. The adjustment is based on a financial index plus a margin set by the lender. Rate caps are in place to limit how much the interest rate can increase or decrease at each adjustment and over the life of the loan.
ARMs are categorized based on the length of the fixed-rate period and the frequency of interest rate adjustments. A 5/1 ARM has a fixed rate for the first five years before adjusting annually, while a 7/1 ARM remains fixed for seven years before annual adjustments. Other options, such as a 10/1 ARM, provide longer fixed-rate periods before the adjustment phase begins. Some lenders offer hybrid ARMs with different adjustment periods, allowing for greater customization in mortgage financing.
Adjustable-Rate Mortgages provide lower initial interest rates compared to fixed-rate loans, resulting in lower monthly payments during the initial period. This allows borrowers to afford a larger home or allocate savings toward other financial goals. ARMs can be particularly advantageous in a declining interest rate environment, where borrowers benefit from lower rates without refinancing. With rate caps in place, adjustments are limited to prevent excessive increases in mortgage payments.
An ARM may be the right choice if you plan to sell or refinance before the fixed-rate period ends. Borrowers comfortable with potential rate adjustments can take advantage of the lower initial interest rate, particularly if they expect an increase in income or declining market rates in the future. If long-term payment stability is a priority, a fixed-rate mortgage may be a better option. Consulting with a mortgage professional can help determine whether an ARM aligns with your financial plans.
Jon Shrum, President of KMC Financial and Team Shrum, helps buyers decide if an adjustable rate mortgage fits their plans. He explains how ARM rates adjust, what your future payments may look like, and compares options across lenders to find strong terms. With clear guidance and no pressure, Jon helps you use ARMs strategically and with confidence.
Adjustable rate mortgages, often called ARMs, offer an initial fixed interest rate for a set period before adjusting over time. These FAQs explain how ARM loans work, rate changes, pros and cons, and when an adjustable rate mortgage may be a smart choice for your home purchase or refinance.
An adjustable rate mortgage is a home loan that starts with a fixed interest rate for a set number of years, such as 5, 7, or 10, and then adjusts periodically based on market rates for the remainder of the loan term.
After the initial fixed period, the rate adjusts at scheduled intervals, often once per year. The new rate is based on a market index plus a margin set by the lender, and your payment may go up or down.
A 5/1 ARM has a fixed rate for the first five years, then adjusts once per year. A 7/1 ARM is fixed for seven years before annual adjustments. These are popular options for buyers who may move or refinance before the adjustment period.
ARM loans often start with lower interest rates than fixed rate mortgages, which may result in lower initial monthly payments. This can be attractive if you want lower payments early on or plan to sell or refinance before rates adjust.
Most ARMs have rate caps that limit how much the rate can increase at each adjustment and over the life of the loan. These caps help protect borrowers from large sudden jumps in payments.
ARMs may be a good fit for buyers who expect to move, sell, or refinance within a few years, or for those who want lower initial payments and are comfortable with potential future rate changes.
The main risk is that your rate and payment may increase after the fixed period ends if market rates rise. It is important to understand worst case payment scenarios and make sure they fit your long term budget before choosing an ARM.
