What Is An Adjustable-Rate Mortgage?

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.

• If you cannot afford your payments, you could lose your home to foreclosure.
• When housing values took a nosedive, many homeowners ended up with underwater mortgages — loan balances higher than the value of their homes.
• Shorter adjustment periods generally carry lower initial interest rates.
• If you’re confident you’ll be moving before the fixed-rate period ends, an ARM could be a great choice.
• If you’re in the military and find yourself relocating every 4 to 5 years, for example, the lower initial rate and payments on an ARM could be a better option than a fixed-rate mortgage.
• A month ago, the average rate on a 30-year fixed refinance was lower at 6.75 percent.
• The average 30-year fixed-refinance rate is 7.01 percent, down 4 basis points over the last week.
• 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.

Adjustable-rate mortgage FAQ

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.

Should you get an adjustable-rate mortgage?

It’s possible for your ARM rate to go down if interest rates fall and then your rate adjusts. ARM rates are much more likely to increase when they adjust than to decrease. An adjustable-rate mortgage is a great tool for many home buyers, but it also comes with serious risks that borrowers need to be prepared for. It can be, especially if they plan to sell or refinance before the initial fixed-rate period ends. Rate caps limit how much the interest rate can increase at each adjustment period and over the life of the loan.

Compare current mortgage rates by loan type

The main benefit of an ARM is the lower initial interest rate, which can result in lower monthly payments during the initial period. This can make ARMs attractive for buyers who plan to sell or refinance before the adjustable period begins. ARMs typically start with a lower initial interest rate compared to fixed-rate mortgages.

Advantages of adjustable-rate mortgages

The average rate on a 5/1 adjustable rate mortgage is 6.25 percent, ticking up 4 basis points over the last week. Rates rose significantly in 2022, making an adjustable-rate mortgage a great option for many would-be homeowners and refinancers. If your plans are to settle in and plant roots for an extended period of time, or the uncertainty of an ARM is frightening, you may be better suited for a fixed-rate mortgage. The big difference between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM) is that FRMs have a fixed interest rate and payment for the entire life of the loan. When you opt for an FRM, your rate and payment can never change unless you decide to refinance into a new mortgage loan.

How ARMs Work: Key Terms

• Fixed and adjustable-rate mortgages choosing depends on your financial goals and risk tolerance.
• Mortgage rates moved in different directions compared to last week, according to Bankrate data.
• Before choosing an ARM, be sure to ask your lender if you would incur any penalties should you decide to pay your loan off early.
• Usually, ARMs start off with a lower interest rate compared to fixed-rate mortgage rates but can increase (or decrease) over time.
• While there are rate caps in place to protect you, that doesn’t mean your rate and payment can’t increase significantly over time.
• Another key characteristic of ARMs is whether they are conforming or nonconforming loans.
• While we adhere to stricteditorial integrity, this post may contain references to products from our partners.

The fact that payments remain the same provides predictability, which makes budgeting easier. Not every lender offers adjustable-rate mortgages, and those that do may not have the exact terms you’re looking for. If you don’t think you can comfortably afford the new monthly payment once the adjustment goes through, you may have to cut costs in other areas. An adjustable-rate mortgage is a home loan with a variable interest rate. This means your ARM rate can change every few months or annually, depending on your terms.

• A fixed-rate mortgage, on the other hand, has one set interest rate that doesn’t change for the life of your loan.
• If your ARM follows the more popular hybrid model, you’ll pay the same low fixed interest rate for the first several years of your loan.
• It also includes finding the right type of mortgage that’s best for your budget—loan term, interest rate and monthly payment all play a factor in what you can reasonably afford.
• Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over.
• The graphic below shows how rate caps would prevent your rate from doubling if your 3.5% start rate was ready to adjust in June 2023 on a $350,000 loan amount.
• The “limited” payment allowed you to pay less than the interest due each month — which meant the unpaid interest was added to the loan balance.
• As you explore your options, think about all the factors that could make an ARM ideal for your situation, or could make an ARM a challenge for you in the future.

Low Initial Fixed Rate

If interest rates are high and expected to fall, an ARM will help you take advantage of the drop, as you’re not locked into a particular rate. If interest rates are climbing or a predictable payment is important to you, a fixed-rate mortgage may be the best option for you. A borrower who chooses an ARM could potentially save several hundred dollars a month for the initial term. Then, the interest rate may increase or decrease based on market rates.

What is a mortgage rate lock?

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.

Real-Life Examples of Fixed and Adjustable-Rate Mortgages

Borrowers faced sticker shock when their ARMs adjusted, and their payments skyrocketed. Since then, government regulations and legislation have increased the oversight of ARMs. The partial amortization schedule below shows how you pay the same monthly payment with a fixed-rate mortgage, but the amount that goes toward your principal and interest payment can change. In this example, the mortgage term is 30 years, the principal is $100,000, and the interest rate is 6%.

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The graphic below shows how rate caps would prevent your rate from doubling if your 3.5% start rate was ready to adjust in June 2023 on a $350,000 loan amount. Fixed-rate mortgages offer interest rate stability over the life of the loan, providing predictable monthly payments and long-term financial planning security. So with a 5/1 ARM, you have a 5-year intro period and then 25 years during which your rate and payment can adjust each year. Note that modern adjustable-rate mortgages come with interest rate caps that limit how high your rate can go, so the cost can’t just increase every year for 25 years. Regardless of the loan type you select, choosing carefully will help you avoid costly mistakes. Weight the pros and cons of a fixed vs. adjustable-rate mortgage, including their initial monthly payment amounts and their long-term interest.

Adjustable-rate loans are changing, because a widely-used interest rate index expires in June

Not every lender charges prepayment penalties, and the length of time for the penalty may vary. Before choosing an ARM, be sure to ask your lender if you would incur any penalties should you decide to pay your loan off early. The table below is updated daily with current mortgage rates for the most common types of home loans. Adjust the graph below to see historical mortgage rates tailored to your loan program, credit score, down payment and location. The 30-year mortgage, which offers the lowest monthly payment, is often a popular choice. However, the longer your mortgage term, the more you will pay in overall interest.

What Is a Hybrid ARM?

If you persist with paying off little, then you’ll find your debt keeps growing, perhaps to unmanageable levels. This means that there are limits on the highest possible rate a borrower must pay. Keep in mind, though, that your credit score plays an important role in determining how much you’ll pay. Mortgage rates moved in different directions compared to last week, according to Bankrate data.

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If you cannot afford your payments, you could lose your home to foreclosure. If rates decrease later, your monthly mortgage payment could go down. If rates start trending down in a few years, you could potentially have a lower rate than what you started with. An adjustable-rate mortgage has an interest rate that can change.

• Yes, their favorable introductory rates are appealing, and an ARM could help you to get a larger loan for a home.
• Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.
• A 5/1 ARM means your rate is fixed for the first five years of the loan.
• An adjustable-rate mortgage (ARM) might be something to consider as you’re exploring different borrowing options.
• After that point, your rate adjusts once per year for the rest of your loan term.
• Rate caps limit how much the interest rate can increase at each adjustment period and over the life of the loan.

An adjustable-rate mortgage makes sense if you have time-sensitive goals that include selling your home or refinancing your mortgage before the initial rate period ends. You may also want to consider applying the extra savings to your principal to build equity faster, with the idea that you’ll net more when you sell your home. Before the 2008 housing crash, lenders offered payment option ARMs, giving borrowers several options for how they pay their loans. The choices included a principal and interest payment, an interest-only payment or a minimum or “limited” payment. As mentioned above, a hybrid ARM is a mortgage that starts out with a fixed rate and converts to an adjustable-rate mortgage for the remainder of the loan term. The loan starts with a fixed interest rate for a few years (usually three to 10), and then the rate adjusts up or down on a preset schedule, such as once per year.

Rate Caps

Rates will depend on your mortgage lender, but in general, lenders reward a shorter initial rate period with a lower intro rate. Whether an adjustable-rate mortgage is the right choice for you depends on how long you plan to stay in the home, rate trends, your monthly budget, and your level of risk tolerance. Some of the most common terms are 5/1, 7/1, and 10/1 ARMs, but many lenders offer shorter or longer intro periods. Some ARMs, such as 5/6 or 7/6 ARMs, adjust every six months rather than once per year. This is usually a few years —  anywhere from three to 10 — and your rate and payment will stay the same for that entire period.

What Is an Adjustable-Rate Mortgage?

A fixed-rate mortgage comes with a fixed interest rate for the entirety of the loan. This means that you benefit from falling rates and also run the risk if rates increase. The term adjustable-rate mortgage (ARM) refers to a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.

This can lead to lower payments in the short term but introduces the risk of rising payments in the future. Understanding the benefits and risks of each type will help you make an informed decision tailored to your financial situation and homeownership plans. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. The best mortgage rate for you will depend on your financial situation.

Rate adjustment periods define how often the interest rate on an ARM can change after the initial fixed period. Common adjustment periods include annually (1-year ARM) or every six months. The terms of the rate adjustment are outlined in the mortgage contract. Most mainstream ARM loan payments include both principal and interest. The only time you won’t pay principal on an ARM is if you opt for a special product like an interest-only or payment-option ARM. These can offer a lower payment that covers just the interest, or possibly not even all the interest due, for a period of time.

When you get a mortgage, you’ll pay interest on the money you borrow. Your interest rate can be either fixed or adjustable — sometimes called variable. This booklet helps you understand important loan documents your lender gives you when you apply for an adjustable-rate mortgage (ARM). With nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting a budget or starting to invest. Her work has been featured in the New York Times, Wall Street Journal, CNN, Yahoo, TIME, AP, CNET, New York Post and more.

Choosing between fixed and adjustable-rate mortgages depends on your financial goals, risk tolerance, and market conditions. Fixed-rate mortgages offer stability and predictability, while ARMs provide lower initial payments and potential savings. Consulting with a financial advisor or mortgage specialist can provide personalized guidance tailored to your specific financial situation and goals.

A month ago, the average rate on a 30-year fixed refinance was lower at 6.75 percent. At the average rate today for a jumbo loan, you’ll pay a combined $666.65 per month in principal adjustable rate mortgage and interest for every $100,000 you borrow. Today’s average rate for the benchmark 30-year fixed mortgage is 6.99 percent, a decrease of 2 basis points from a week ago.

The initial interest rate on an adjustable-rate mortgage is sometimes called a “teaser” rate, and ARMs themselves are sometimes referred to as “teaser” loans. There are different types of ARMs to choose from, and they have pros and cons. ARMs offer flexibility, allowing homeowners to benefit from lower initial rates and potentially lower payments if market rates decrease. However, this comes with the risk of rising payments if rates increase. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers.