An adjustable rate mortgage, or ARM, is a mortgage with a fixed interest rate for an initial period, after which the interest can move up or down each year based on a market index. This rate adjustment can cause your monthly mortgage payments to change as well.
The fixed interest rate period is typically 5, 7, or 10 years, and rates usually adjust annually after that for the remainder of the loan (which is usually 30 years in total). For example, a 7/1 ARM features a fixed interest rate during the first 7 years of the loan, and then the rate adjusts once a year (that’s the “1” part) after that for the next 23 years. Both the percentage that the rate can adjust annually as well as the total rate adjustment possible over the life of the loan are usually capped.
What would be my monthly payment on an adjustable rate mortgage?
ARM rates depend on your credit, income, and other factors. Contact us to figure out what your adjustable rate mortgage payment is likely to be.
What are ARM interest rates today?
Current adjustable mortgage rates vary quite a bit by the length of the initial term — 5-year, 7-year, and 10-year initial periods are available from Newfi. Your credit score, income, and other factors influence your rate. Rates can change every day, so it’s smart to find out what rate you qualify for today.
Frequently Asked Questions
What are the advantages of an adjustable rate mortgage?
- Low initial interest rate, during which rates cannot change
- Rates during the initial, fixed-rate period are usually lower than 30 year fixed rates
- Lower payments let you afford more house for a given payment, or save more for other financial goals
- Caps on interest rate adjustments put limits on total possible change in payments
- May benefit borrowers who plan to sell or refinance before the end of the initial fixed-rate period
What are the disadvantages of an adjustable rate mortgage?
- Given current low interest rates, rates are most likely to adjust upwards
- Changes in interest rates could cause your monthly mortgage payments to go up, perhaps dramatically
- If you can’t afford higher monthly payments, you may be forced to sell or refinance your home sooner than you want
- You may be able to find lower interest rates for some fixed-rate loans (like the 15 year fixed)
How does an adjustable rate mortgage work?
As the name implies, ARMs have interest rates that “adjust” (that is, move up or down) depending on the movements of the interest rates to which they are indexed. Most often that index is LIBOR, the London Interbank Offered Rate.
At the end of the initial fixed period (which is 5, 7, or 10 years long, depending on the ARM you choose), the rate will adjust. This adjustment is limited by caps, which limit (1) how much the interest rate can change at each adjustment period; and (2) how much the interest rate can change overall.
Note that most lenders quote conventional mortgage rates. If the amount you need to borrow is above a certain limit, you may have to get a jumbo mortgage loan. That limit varies from county to county — contact us if you want to know more.
How does an ARM compare to a fixed rate mortgage?
- A fixed rate mortgage gives you the security of knowing you have one fixed monthly payment for the life of your loan, regardless of interest rate movements. Rates and monthly payments may be higher, however. The most common fixed rate mortgage is the 30 year fixed; you can learn more about the 30 year fixed.
- An adjustable rate mortgage may have lower interest rates and thus lower monthly mortgage payments than a standard 30-year mortgage. However, you run the risk that rates and mortgage payments could go up after the initial fixed-rate period.
What other mortgage options do I have?
- Want a low, fixed interest rate for the life of your loan? Consider a 30 year fixed mortgage.
- Need easier terms? Consider an FHA loan, which also permits low down payments and more flexible credit qualifications.
- Want a very low interest rate on a fixed-rate mortgage? Consider a 15 year fixed mortgage.
Why trust Newfi Lending with your adjustable rate mortgage?
Newfi is a direct lender, not a broker, so we can make lending decisions fast and at low interest rates. We’ve earned a five-star customer satisfaction rating from LendingTree for our low rates, fast processing, and excellent customer service. Give us a call at (888) 316-3934 and see just how friendly we are!