Research Adjustable Rate Mortgage (ARM) Programs and Compare Interest Rates & Closing Costs

Young couple in front of their home in the country.

Adjustable rate mortgages, often referred to as “ARMs”, have a set number of years where they carry introductory rates often lower than traditional 10 – 40 year fixed rate products. Upon completion of the initial fixed-rate introductory periods, rates begin to adjust up or down based upon the value of an assigned index. Most ARM programs have a 30 year amortization period. This means that borrowers are typically expected to repay the loan over the course of 30 years (360 months).

If you are looking for a low initial payment and only plan to be in a home for ten years or less, an adjustable rate mortgage might make sense. Ask your mortgage banker, lender, or broker if a adjustable rate loan product might be right for you.

Advantages vs. Disadvantages of ARM Financing

It is very important to research adjustable rate mortgage information and weigh the pros and cons. Although you may save money by locking in on a lower rate initially, you have to weigh the risk of a potential hike in interest rates. It is a matter of individual risk tolerance. Typically, the shorter the fixed period of an arm, the lower the rate. For example, the starting rate for a 5 year ARM mortgage may be slightly higher than a 3/1 adjustable rate mortgage. Typically loans are offered from 1 year arms to up to 10 year arms.

Popular Adjustable Rate Products and their Introductory Rate Periods

  • 10/1 ARM – Introductory rate period lasts 10 years (120 months). Often used as an alternative to a 30 year fixed rate mortgage by borrowers willing to taken on some risk.
  • 7/1 ARM – Introductory rate period lasts 7 years (84 months)
  • 5/1 ARM – The most popular ARM program. Introductory rate period lasts 5 years (60 months)
  • 3/1 ARM – Introductory rate period lasts 3 years (36 months)
  • 1/1 ARM – Introductory rate period lasts 1 year (12 months). Not a very popular solution and pricing often reflects that.

You may want to ask yourself a few questions before pursuing an adjustable rate financing solution:

  • How long do I plan to be in the home? You can use the aforementioned introductory rate period information to help narrow down which ARM product gets you closest to your estimated time in the property.
  • Will I be able to cover higher payments if the rate increases?
  • How much will I save with an ARM? How could those savings help my family and me with other needs?
  • Could an adjustable rate mortgage help me afford a more expensive home and do I believe that my future income will cover the risk of adjustments in rate?
  • Is taking out a adjustable rate mortgage in a declining market a good idea? Probably not, unless you have substantial equity in the home. You do not want to be upside down in your mortgage and not be able to refinance once your ARM starts to adjust.

Find Information on Specific Programs

What are the Financial Indexes Most Adjustable Rate Mortgages are Tied To?

Most ARM programs in the United States are tied to the LIBOR (London Interbank Offered Rate) or the MTA (12 Month Treasury Index Average). You may also run across adjustable rate mortgages associated with the COFI (11th District Cost of Funds Index) and the CMT (Cost Maturity Treasury).

Ask your mortgage professional for insight into which index is the most volatile at the time you plan on taking out your mortgage. While the rate from one lender might be appealing, when coupled with a volatile index, the program might be less attractive than an alternative solution.

What are Loan Caps, How Do They Work, and How Do You Know What to Look For?

Adjustable rate mortgages have caps which are in place to help prevent payment shock. In other words, they ensure that a borrower’s rate cannot skyrocket at each adjustment interval. Most loans have three caps which are often displayed as X/Y/Z. For example, a 5 year adjustable rate mortgage may have caps of 5/2/5. In this scenario, there is a 5% cap on the fist adjustment, a 2% adjustment cap, and a 5% cap for the lifetime of the loan.

Research Today’s Adjustable Mortgage Rates

You can use the rate table below to compare ARM rates and closing costs from some of the nation’s leading lenders, brokers, and banks. Please note that the company that compiles the data for the rate table does not collect pricing for all of the ARM products offered in the marketplace. Most lenders and brokers have access to 1 year, 3 year, 5 year, 7 year, and 10 year ARMs. You may need to reach out to the participating companies for more information if you do not see what you’re looking for. Also, the rates, APRs, and closing costs published in the survey are for primary residences. Most lenders also offer adjustable rate financing for investment properties and second homes although rates are typically higher as they are viewed as riskier investments.

If you’re looking for non-conforming jumbo loan pricing, be sure to type in your higher loan amount into the rate table to view relevant pricing. You may also find interest only mortgage rates (IO) being offered by some of the participating companies. Please note that interest only loans carry added risk and we recommend that you consult with a licensed mortgage professional before choosing an interest only product.


Other FAQs Related to Adjustable Rate Mortgages

Are interest rates always lower on ARMs when compare to fixed rate mortgages?

Not necessarily. In a low rate environment like we’ve seen over the past few years, fixed rates have been so low that they’ve been more attractive than ARMs in many cases.

Can you end up with a higher loan amount than you started with?

You may have heard some horror stories from the early 2000’s about borrowers taking out Option ARMs (also called Pick-a-Payment loans) where they ended up owing more than they did at the onset of their loans. This negative amortization will not occur with most adjustable rate products and we’re not aware of anyone in the marketplace offering Option ARM financing at this time.

Why would an ARM’s APR be advertised lower than its note rate?

You may see this occur when an index which a loan is tied to is really low and the projected adjustment used to determine future APR predictions forecasts that the rate may be lower down the road. Honestly, it really does not matter that much because of how quickly things can change in the financial markets over a short period of time. Without access to a crystal ball, you’re going to just have to hope for the best.

Can an interest rate go down too?

In most cases, yes. With most agency (Fannie Mae and Freddie Mac) loan programs, a borrower’s rate can go up or down based upon a loan’s index. Many subprime ARM programs from the early 2000’s only could go one direction – up (go figure). Always be sure to ask this question to your mortgage professional especially if you’re working with a local bank or credit union who may have their own proprietary loan programs.