Adjustable Rate Mortgage (ARM) FAQs, Requirements, & Qualifications
An adjustable-rate mortgage is a home loan that could work for you, especially if you want additional flexibility. An ARM has a mortgage rate that adjusts according to market conditions over time and could help homeowners save if rates go down over time.
There are different types of ARM loans available. These options vary based on the length of time of the initial rate period and the adjustable-rate period. Which one you choose depends on what is best for your long-term financial needs.
Learn more about adjustable-rate mortgages, and then take a look at current rates and apply today!
What is an ARM?
ARM mortgages can be confusing to understand, but the main point to know is that they have an introductory rate period followed by a variable rate period that is based on market trends. These loans can be as long as 30 years or as short as five years with several options available.
Adjustable-rate mortgages allow users to potentially save over the life of the loan if rates go down.
How does an ARM work?
An ARM works by starting off with a low fixed rate introductory period followed by a period of adjustable rates. The initial period is always shorter than the longer adjustable-rate period. There are varying time lengths that you can pick from, each has their pros and cons depending on what fits your financial ambitions.
An important aspect to keep in mind is that your interest rate changes. The concern with having an ARM is the rate continuing to climb based on current rates. This means that if market conditions changes, it's a possibility to have to pay more in the future. However, a lot of lenders offer incentives such as having a hybrid ARM or adding caps to the loan.
Hybrid ARM: this type of ARM allows you to have a fixed rate for a few years and then the rate changes yearly after the fixed rate period.
Caps: having a cap on your ARM loan means that there is a ceiling to how high your interest rate can climb, typically two types exist.
- Periodic / Subsequent cap: also known as payment caps, these put a limit to how much your interest rate can move from one adjustment period to the next. For example, it may stipulate no more than a 2% increase every year.
- Lifetime cap: is how much your rate can climb over the life of the loan.
- Initial cap: how much the interest rate can increase after the low rate period has ended.
Which types of adjustable-rate mortgage are available?
There are many different types of adjustable-rate mortgages available. An ARM is typically displayed as two numbers. For example, you may see an ARM advertised as being 5/1, the first number indicates how long the fixed rate period will be. In this case, it's five years long. The second number indicates how many times the interest rate will adjust after the initial period ends. If the second number is a '1', the rate will adjust once a year.
The most frequently used types of adjustable-rate mortgages are: 5-year ARM, 7-year ARM, and 10-year ARM.
ARM | VARIATIONS | DESCRIPTION |
5-year | 5/6, 5/1 | 5 years with a low fixed rate followed by 25 years of adjustable rates, tends to offer the best rates for buyers as an incentive |
7-year | 7/6, 7/1 | 23 years in the adjustment period, rates are not as good as a 5-year old but lower than the 10-year loan |
10-year | 10/6,10/1 | 10 years of fixed rates followed by 20 years of adjustable rates, this provides less time in the adjustment period |
What’s the difference between an ARM and a fixed-rate mortgage?
The biggest difference between an ARM and a fixed-rate mortgage. The rate on a fixed-rate mortgage does not change over the life of a loan, while an adjustable-rate mortgage changes periodically after an initial period. The rates during the fixed rate period of an ARM loan are typically lower than a fixed-rate mortgage.
During the adjustable period an ARM loan can never go lower than the margin set in your mortgage agreement. Fixed rate mortgages are typically 15 or 30 years long while adjustable-rate mortgages are 30 years in length.
Can I refinance an ARM?
Yes, you can refinance an ARM just like any other loan. You can refinance into a fixed-rate mortgage or a new ARM. It's not uncommon for buyers to refinance when heading towards the end of the introductory period of the ARM loan.
Refinancing will mean a new agreement and all of the qualifications (credit score, debt-to-income ratio, etc) will need to be in good standing prior to getting a new mortgage.
Where can I apply for an adjustable-rate mortgage?
To review, an ARM is a mortgage loan that has the potential to provide savings. An adjustable-rate mortgage offers a competitive initial rate, upfront savings, and the possibility of low rates during the adjustable period. There are some risks due to the unpredictability of the rates during the adjustable period. Having caps placed on the loan may help absorb some of the interest rate volatility. An adjustable-rate mortgage also provides the ability to move in or out of a loan at any time during the adjustable time period.
Deciding to purchase a home is a huge decision and you want to go into it with a clear view of all of your options. There are many options out there but we guarantee as you continue to shop around that you will find that Rate.com has very low rates and it is easy to apply.