A Mortgage Rate That Can Adjust Over Time.
An Adjustable-Rate Mortgage, or ARM, is a home loan with an interest rate that is typically fixed for an initial period and then may adjust periodically based on the terms of the loan.
That means your starting rate may be different from a traditional fixed-rate mortgage, and your payment could change in the future.
How Does an ARM Work?
Think of an Adjustable-Rate Mortgage in two stages.
The Initial Fixed Period
Your interest rate stays the same for a set period of time.
The Adjustment Period
After the initial period, the rate may adjust according to the terms of your loan.
What Does “5/1 ARM” Mean?
Your initial rate is generally fixed for 5 years.
After that, the rate can generally adjust once per year.
Other ARM structures may be available, including 7/1 and 10/1 ARMs.
ARM programs, adjustment periods, caps, qualification requirements, and availability vary. Your Loan Officer can explain the specific terms available for your situation.
Another Way to Structure Your Mortgage
An ARM isn't necessarily the right fit for everyone, but it can make sense in certain situations.
You Don't Plan to Keep the Mortgage for Decades
If you expect to move or sell before the first adjustment, the initial fixed-rate period may be particularly relevant to your decision.
You're Looking for a Different Payment Strategy
An ARM may offer a different starting rate than available fixed-rate options, which can affect your initial monthly payment.
You Expect Your Financial Situation to Change
Some borrowers may plan to refinance, move, or otherwise change their financing before the ARM adjusts. Future rates and refinance opportunities aren't guaranteed.
You Want More Options
One of the biggest benefits may simply be having another financing option to compare when deciding how to structure your mortgage.
Example: A 5/1 ARM
Let's say a borrower purchases a $400,000 home and chooses a hypothetical 5/1 ARM.
*Principal and interest only. Taxes, insurance, mortgage insurance, HOA fees, and other costs are not included.
For the first five years, the interest rate doesn't change. After that, the rate may adjust annually based on the loan's specific terms.
It could go up. It could go down. And it may be limited by the loan's adjustment caps.That's why understanding the loan's terms before choosing an ARM is so important.
What Keeps an ARM From Changing Without Limits?
ARMs generally have rate caps that limit how much the interest rate can change.
You'll often see caps described using three numbers. One example is:
This is simply an example of how ARM caps may be presented.
Example maximum increase at the first adjustment.
Example maximum increase at later adjustments.
Example maximum increase over the life of the loan.
ARM vs. Fixed-Rate Mortgage
There isn't one mortgage that works for every borrower. Understanding the differences can help you have a more productive conversation with your Loan Officer.
ARM
- Rate is typically fixed for an initial period
- Rate may adjust after the fixed period
- Adjustment limits are defined by loan caps
- Initial pricing may differ from fixed-rate options
- Requires understanding future adjustment scenarios
Fixed Rate
- Interest rate remains fixed for the loan term
- Principal and interest payment is more predictable
- No periodic rate adjustments
- Starting rate may differ from available ARM options
- Often considered for longer-term payment stability
Questions to Ask Before Choosing an ARM
Don't Count Yourself Out Because of Today's Rate.
Mortgage rates don't have to be a reason to stop looking at your options. There are different loan structures, different strategies, and different ways to structure a purchase.
An ARM may be one of those options.
Talk with a Trident Loan Officer about your goals, how long you expect to own the home, and which financing options may fit your situation.
