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Adjustable-Rate
Mortgage Loan
What Is An Adjustable-Rate Mortgage (ARM) Loan?
An Adjustable-Rate Mortgage (ARM) loan is a home loan with an interest rate that changes periodically based on market conditions. Unlike a fixed-rate mortgage, where your interest rate remains the same throughout the loan term, an ARM typically starts with a lower fixed rate for an initial period (such as 5, 7, or 10 years) and then adjusts annually. This can be a great option for homebuyers looking to take advantage of lower initial payments, especially if they plan to sell or refinance before the rate adjusts. Learn more about our loan programs or explore our home purchase loans to find the best mortgage solution for your needs.
Adjustable-Mortgages Vs. Fixed-Rate Mortgages
When choosing a mortgage, it’s essential to understand the differences between Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages to decide which option best fits your financial goals.
Adjustable-Rate Mortgages (ARMs): ARMs offer an initial period with a lower, fixed interest rate, after which the rate adjusts periodically based on market conditions. This makes them ideal for borrowers planning to sell or refinance before the adjustment period, or those expecting interest rates to decrease. However, after the fixed period ends, monthly payments can fluctuate.
Fixed-Rate Mortgages: With a fixed-rate loan, your interest rate and monthly payments remain constant throughout the loan term, providing long-term stability and predictable budgeting. While fixed-rate loans may start with higher interest rates than ARMs, they protect you from future rate increases.
How Does An Adjustable-Rate Mortgage Work?
An Adjustable-Rate Mortgage (ARM) starts with a fixed interest rate for an initial period — typically 5, 7, or 10 years — giving homeowners lower, more affordable monthly payments upfront. After this period, the interest rate adjusts at regular intervals (usually annually) based on a market index, which can cause your monthly payments to increase or decrease.
For example, with a 5/1 ARM, your interest rate stays fixed for 5 years and then adjusts every year after that. These adjustments are influenced by factors like the U.S. Treasury rate or the Secured Overnight Financing Rate (SOFR), plus a set margin determined by the lender.
ARMs can be a great option if you plan to sell, refinance, or expect interest rates to drop in the future — but they do carry some risk of higher payments down the line. Want to explore whether an ARM is right for you? Check out our loan programs or contact us for expert guidance!
Need Help Choosing the Right Mortgage?
Navigating your home loan options can feel overwhelming — but you don’t have to do it alone. If you’re unsure which mortgage is the best fit for your goals, it might be time to connect with a trusted mortgage loan officer.
An experienced loan officer can walk you through your options, explain the details, and help you choose a loan that aligns with your budget and long-term plans. Whether you're buying your first home, refinancing, or investing, personalized guidance makes all the difference.
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Start my applicationDifferent Types Of ARM Loans
5/1 ARM:
Fixed interest rate for the first 5 years, then adjusts annually. This is a popular choice for homeowners planning to sell or refinance within a few years.
7/1 ARM:
Fixed rate for 7 years, adjusting annually after that. Ideal if you want more initial stability but still want lower rates than a fixed-rate loan.
10/1 ARM:
Fixed rate for 10 years, then adjusts yearly. Great for homeowners who want a longer period of predictability before potential adjustments.
3/1 ARM:
Fixed rate for 3 years, then adjusts annually. This can be a smart option for short-term homeownership.
5/5 ARM:
Fixed for 5 years, adjusting every 5 years after that. Fewer adjustments can make budgeting easier compared to annual resets.
Interest-Only ARM:
This type allows you to pay only the interest for a set period, reducing initial payments, though you’ll pay more over time.
Choosing the right ARM depends on your future plans and risk tolerance. Want to explore this further? Visit our Adjustable-Rate Mortgage Loans page or schedule a consultation with a loan expert!
Advantages and Disadvantages of ARMs
Advantages of ARMs:
Lower Initial Rates: Pay less in the early years compared to fixed-rate loans.
Potential Savings: If rates stay low or drop, you could save money long-term.
Short-Term Flexibility: Ideal if you plan to sell or refinance before rates adjust.
Increased Borrowing Power: Lower initial payments can help you qualify for a larger loan.
Disadvantages of ARMs:
Rate Increases: Payments can rise after the fixed period ends.
Market Uncertainty: If rates climb, your monthly costs could spike.
Complex Terms: Caps, margins, and adjustments can be tricky to navigate.
Risk of Negative Amortization: In some cases, unpaid interest could add to your loan balance.
Adjustable-Rate Mortgage Calculator
STILL NOT SURE?
Frequently Asked Questions
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What are the typical caps on interest rate adjustments for ARMs?
ARMs often include caps that limit how much the interest rate can increase per adjustment period and over the life of the loan. Common caps include:
Initial Adjustment Cap: Limits the rate increase during the first adjustment period after the fixed-rate phase.
Subsequent Adjustment Cap: Limits rate increases in following adjustment periods. Lifetime Cap: Sets a maximum on how much the interest rate can increase over the entire loan term.
Are there prepayment penalties?
Some ARMs charge a fee if you pay off the loan early. Check your loan terms to confirm.
How does the margin affect my rate?
Your interest rate = index rate + margin (a fixed percentage).
What factors influence ARM rates?
ARM rates adjust based on market indexes like the U.S. Treasury or SOFR.
What are the qualification requirements?
You’ll need a good credit score, steady income, and a healthy debt-to-income ratio.
Can I refinance an ARM?
Yes, you can refinance to a fixed-rate or another ARM, depending on your credit and market rates.
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