A lower starting rate may help you plan for the years you expect to own your home. Get a free quote today.
An adjustable rate mortgage, or ARM, is a home loan with a rate that can change. In contrast, a fixed rate stays the same for the whole loan. An ARM starts with a fixed rate for a set time. After that, the rate adjusts on a schedule. As a result, your monthly payment can go up or down.
Every ARM has two stages.
Stage 1: The fixed period. Your rate stays the same at first. Many ARMs hold the rate for several years, such as 5, 7, or 10. During this time, your payment does not change.
Stage 2: The adjustment period. After that, your rate resets at regular times. For example, a 5/6 ARM is fixed for 5 years. Then it adjusts every 6 months.
At each reset, your new rate is based on two things. The first is an index, which follows the market. The second is a margin, which is a set number your lender adds. Most ARMs also have caps. These limit how much your rate can rise at each reset and over the life of the loan.
The starting rate on an ARM is often lower than on a fixed rate loan. Because of this, an ARM may be worth a look if:
Also, a lower starting payment may free up cash for other goals. Even so, it helps to have a plan for the day your rate adjusts.
An ARM can cost more later. Here is what to keep in mind:
For this reason, ask one simple question before you choose. Could you afford the highest payment your loan allows? If the answer is yes, an ARM may be a good fit.
An ARM often starts with a lower rate. However, its payment can change after the fixed period.
A fixed rate mortgage works differently. Its rate and payment stay steady for the life of the loan. That makes budgeting easier. On the other hand, the starting rate is often higher than on an ARM.
So, which is better? It depends on your budget, your plans, and how much change you are comfortable with. Want to see the other side? Read about our 30 year fixed mortgage or our 15 year fixed mortgage.
Once the fixed period ends, you have a few choices. You can keep the loan and let the rate adjust. You can also refinance into a new ARM or a fixed rate loan. Or, you can sell your home.
Each choice has pros and cons. That is why it helps to think about your options before you sign. Our refinance calculator can help you look ahead.
Lenders look at the full picture. First, they review your credit history. Next, they check your income and work history. They also look at your monthly debts. Finally, they consider your down payment and the home you plan to buy.
Rules vary by lender and loan type. For example, ARMs are offered for many loan types, including jumbo loans. Availability depends on the lender and the loan program.
The best way to learn more is to ask. We can review your situation and explain your options. For a rough idea of your budget, you can also try our home affordability calculator.
Getting a quote is simple.
Yes, it can. If market rates fall, your rate may drop at a reset. However, it may also rise. Your loan’s caps and floor limit how far it can move.
A rate cap is a limit on how much your rate can change. Most ARMs have a cap for each reset. They also have a cap for the life of the loan. Ask your lender to explain the caps on any loan you consider.
Often, yes. Many homeowners do this before the fixed period ends. Still, approval is not guaranteed. It depends on your credit, income, home value, and market rates.
It can be. An ARM may suit you if you expect to move or earn more in a few years. On the other hand, you may prefer a fixed rate if you want steady payments. We can help you weigh both.
Choosing a mortgage is a big decision. That is why we give clear answers and simple options. Get your free quote today. Then see if an adjustable rate mortgage fits your plans.
Most homeowners get into adjustable-rate mortgages for the lower initial payment, and then usually refinance the loan when the fixed period ends. At that time, the interest rate becomes variable, or adjustable, and the homeowner would likely refinance into another ARM, something fixed, or sell the home outright.
