See the table below for a detailed breakdown of how each loan type moved. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Two key factors known as “index” and “margin” determine your ARM’s interest rate. When interest rates are falling, the interest rate on an ARM mortgage will decline without the need for you to refinance the mortgage. To make sure you can repay the loan, some ARM programs require that you qualify at the maximum possible interest rate based on the terms of your ARM loan. Another key characteristic of ARMs is whether they are conforming or nonconforming loans.

How to qualify for an adjustable-rate mortgage

Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can rise or fall. Unlike ARMs, traditional or fixed-rate mortgages carry the same interest rate for the life of the loan, which might be 10, 20, 30, or more years.

Can I refinance an ARM to a fixed-rate mortgage?

Fixed-rate mortgages are the most popular choice for mortgage borrowers. The stable rate and payment make FRMs a safer option for homeowners because they never risk their payments rising and becoming unaffordable. The traditional 30-year fixed-rate mortgage is the most common type of home loan, followed by the 15-year fixed-rate mortgage. If you’ve ever seen a buying option like 5/1 or 7/1 ARM, that’s a hybrid adjustable-rate mortgage. For these types of loans, the interest rate is fixed for a set number of years—like three, five or seven, for example.

Adjustable-rate mortgage FAQ

This allows them to still afford the home they want without having to compromise due to higher rates. With a rate cap structure of 2/2/5, your rate could increase up to 5% at its first adjustment; as high as 7% at its second adjustment; and no higher than 8% over the entire life of the loan. The first number is how long the interest rate is fixed and the second number is 5/1 adjustable-rate mortgage news how frequently that rate changes after the initial period. For instance, using our same example from above, a 5/1 ARM means the rate is fixed for five years and then variable every year after that. Based on the terms you agreed to with your mortgage lender, your payment could change from one month to the next, or you might not see a change for many months or even years.

How Fixed Interest Rates Work

But payments will balloon later on, and when this happens you will still have the full loan balance to pay off. Keep in mind that adjustable mortgage rate don’t always increase. If the index rate to which your loan is tied has fallen by the time your loan adjusts, your rate and payment also have to potential to go down. The initial period of an ARM where the interest rate remains the same typically ranges from one year to seven years. An ARM may make good financial sense if you only plan to live in your house for that amount of time or plan to pay off your mortgage early, before interest rates can rise. While there are rate caps in place to protect you, that doesn’t mean your rate and payment can’t increase significantly over time.

What are ARM rate caps?

Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. In a volatile market, mortgage rates can rise swiftly and with little warning.

Is an adjustable-rate mortgage right for you?

These caps limit the amount by which rates and payments can change. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles. During periods of higher rates, ARMs can help you save money in the early days of your loan by securing a lower initial rate. Just keep in mind that after the introductory period of the loan, the rate — and your monthly payment — might go up. The initial borrowing costs of an ARM are fixed at a lower rate than what you’d be offered on a comparable fixed-rate mortgage. But after that point, the interest rate that affects your monthly payments could move higher or lower, depending on the state of the economy and the general cost of borrowing.

What Is an Interest-Only Mortgage?

An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

• Deciding between an adjustable-rate mortgage and a fixed-rate mortgage is an important consideration.
• This can make it more difficult to budget mortgage payments in a long-term financial plan.
• After that initial period, the rate adjusts annually or according to the terms set by the lender, which might be more or less frequent.
• After that period ends, interest rates — and your monthly payments — can rise or fall.
• Still, borrowers considering an ARM should always plan for the worst-case scenario.
• Learn more about how fixed-rate mortgages compare to adjustable-rate mortgages, including the pros and cons of each.
• An interest-only (I-O) mortgage means you’ll only pay interest for a set amount of years before you get the chance to start paying down the principal balance.
• At Bankrate we strive to help you make smarter financial decisions.
• Although the Fed has cut interest rates 100 basis points since September, mortgage rates have only risen, up 0.71 percentage points since September’s low, according to Bankrate data.

Increase your down payment

Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Adjustable-rate mortgages, on the other hand, have fluctuating interest rates.

ARM terms defined

• Fixed-rate mortgages offer stable interest rates and predictable monthly payments, ideal for long-term planning and security.
• ARM loan guidelines require a 5% minimum down payment, compared to the 3% minimum for fixed-rate conventional loans.
• Make sure to weigh the pros and cons before choosing this option.
• Traditional lenders offer fixed-rate mortgages for a variety of terms, the most common of which are 30, 20, and 15 years.
• We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site.
• For instance, using our same example from above, a 5/1 ARM means the rate is fixed for five years and then variable every year after that.

Bankrate follows a stricteditorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. An adjustable-rate mortgage (ARM) is a type of home loan that offers a low fixed rate for the first few years, after which your interest rate and payment can move up or down with the market. With an I-O home loan, you’ll have smaller monthly payments that increase over time as you eventually start to pay down the principal balance. The longer your I-O period, the larger your monthly payments will be after the I-O period ends. With a fixed-rate loan, you’ll pay one set amount every month for the duration of your loan term, like 15, 20 or 30 years.

Shorter-term mortgages offer a lower interest rate, which allows for a larger amount of principal repaid with each mortgage payment. So, shorter term mortgages usually cost significantly less in interest. In a fixed-rate mortgage, the interest rate is set at the beginning of the loan and does not fluctuate with market conditions. This fixed rate is typically determined based on the borrower’s creditworthiness, the loan term, and prevailing market rates at the time of origination.

Pros And Cons Of An Adjustable-Rate Mortgage (ARM)

• There are a few different indexes, and the benchmark index rate your lender chooses might be different from what another lender chooses.
• ARMs tend to be more popular with younger, higher-income households with bigger mortgages, according to the Federal Reserve Bank of St. Louis.
• The initial borrowing costs of an ARM are fixed at a lower rate than what you’d be offered on a comparable fixed-rate mortgage.
• The most common initial fixed-rate periods are three, five, seven and 10 years.
• The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise.
• Understanding the benefits and risks of each type will help you make an informed decision tailored to your financial situation and homeownership plans.

ARM loan guidelines require a 5% minimum down payment, compared to the 3% minimum for fixed-rate conventional loans. Always read the adjustable-rate loan disclosures that come with the ARM program you’re offered to make sure you understand how much and how often your rate could adjust. ARMs have been around for several decades, with the option to take out a long-term house loan with fluctuating interest rates first becoming available to Americans in the early 1980s. Unlike fixed-rate borrowers, you won’t have to make a trip to the bank or your lender to refinance when interest rates drop.

However, the deterioration of the thrift industry later that decade prompted authorities to reconsider their initial resistance and become more flexible. Lenders are required to put in writing all terms and conditions relating to the ARM in which you’re interested. A payment-option ARM is, as the name implies, an ARM with several payment options. These options typically include payments covering principal and interest, paying down just the interest, or paying a minimum amount that does not even cover the interest. With this type of loan, the interest rate will be fixed at the beginning and then begin to float at a predetermined time. The average 30-year fixed-refinance rate is 7.01 percent, down 4 basis points over the last week.

• You’ll have a fixed rate for the first decade, and then the rate changes once per year after that.
• With a 5/1 ARM, you would have an introductory fixed-rate period of five years.
• An adjustable-rate mortgage (ARM) is a type of home loan that offers a low fixed rate for the first few years, after which your interest rate and payment can move up or down with the market.
• After that, the interest rate adjusts at specific regular intervals.
• When interest rates are falling, the interest rate on an ARM mortgage will decline without the need for you to refinance the mortgage.
• A fixed-rate mortgage comes with a fixed interest rate for the entirety of the loan.
• With less purchasing power at higher fixed rates, the lower introductory rates attached to ARMs have started to look much more appealing.

Payment uncertainty

This can make it more difficult to budget mortgage payments in a long-term financial plan. ARMs have a fixed period of time during which the initial interest rate remains constant. After that, the interest rate adjusts at specific regular intervals. The period after which the interest rate can change can vary significantly—from about one month to 10 years. Shorter adjustment periods generally carry lower initial interest rates.

Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. Life doesn’t always go as planned, and staying in the home for an extra few years could end up costing you if your rate goes up before you’re able to sell. In this situation, you might want to consider giving yourself a bigger buffer, such as getting a 10/6 ARM. Use our interactive Loan Estimate to double-check that all the details about your loan are correct. If something looks different from what you expected, ask your lender why.

• This could give you more cash to invest in other ventures or achieve other financial goals.
• The first number, five, is how long the fixed interest term will last on your loan.
• In the recent past, ARMs have charged as much as a full percentage point less than fixed mortgages.
• But after that point, the interest rate that affects your monthly payments could move higher or lower, depending on the state of the economy and the general cost of borrowing.
• Mortgages allow homeowners to finance the purchase of a home or other piece of property.

If you keep the same loan with the same lender, your mortgage payment won’t change. An ARM, sometimes called a variable-rate mortgage, is a mortgage with an interest rate that changes or fluctuates during your loan term. Other loans typically have a fixed rate, where the interest rate doesn’t change over the life of the loan.

An adjustable-rate mortgage, or ARM, is a home loan that has an initial, low fixed-rate period of several years. After that, for the remainder of the loan term, the interest rate resets at regular intervals. When you get a mortgage, you can choose a fixed interest rate or one that changes. Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over. Fixed-rate mortgages make up almost the entire mortgage market when rates are low.

That’s because you’re probably already getting the best deal available. Mortgage rates have decreased somewhat since earlier this year, with the 30-year fixed-rate loan down from a high of 7.39 percent in May. Monthly payments on a 5/1 ARM at 6.25 percent would cost about $616 for each $100,000 borrowed over the initial five years. While an ARM is one way to repay your home loan, it’s not always the best way for everyone. Make sure to weigh the pros and cons before choosing this option.