While fixed-rate mortgages are far more popular than adjustable-rate mortgages, the latter are worth considering if you’ve got a little tolerance for uncertainty. That’s because an ARM may offer a low rate during its introductory period before adjustments kick in—making this loan type potentially attractive for folks planning to rent out or flip the property they’re buying, or who are planning to move before the introductory period comes to an end.
TL;DR
- Adjustable-rate mortgages (ARMs) offer lower initial rates, potentially benefiting short-term owners or investors.
- ARM rates adjust after an introductory period based on benchmarks like SOFR and lender margins.
- ARMs can provide lower initial payments but carry risks of future payment increases and less predictability.
- Refinancing from an ARM to a fixed-rate mortgage is possible if circumstances change.
Stay with us and we’ll walk you through how ARMs work, take a look at when they might be considering instead of a regular fixed-rate mortgage, and consider current ARM rates from a few top lenders.
You can see the previous business day’s ARM rates report here.
Top lenders' ARM rates
Coins2Day reviewed the most recent data available as of Nov. 6. These are sample rates provided by the institutions. Each one is based off specific assumptions about a hypothetical borrower’s credit profile and location. Estimates may include an assumption of mortgage discount points. If you choose to apply, know that the rate you receive may vary from the sample rates shown here.
| Bank of America 7/6 ARM | U.S. Bank 7/6 ARM | Zillow Home Loans 7/6 ARM | |
|---|---|---|---|
| Interest Rate | 5.750% | 6.000% | 6.125% |
| APR | 6.581% | 6.648% | 6.731% |
| Interest Rate | |
|---|---|
| Bank of America 7/6 ARM | 5.750% |
| U.S. Bank 7/6 ARM | 6.000% |
| Zillow Home Loans 7/6 ARM | 6.125% |
| APR | |
| Bank of America 7/6 ARM | 6.581% |
| U.S. Bank 7/6 ARM | 6.648% |
| Zillow Home Loans 7/6 ARM | 6.731% |
A 7/6 ARM is one with a fixed rate for seven years, then adjustment periods every six months.
Fixed vs. Adjustable mortgages
Fixed-rate home loans represent roughly 92% of all U.S. Mortgages—a testament to their reliability. Unlike ARMs, which allow interest rate changes after an initial period, fixed-rate loans guarantee one rate for the life of the mortgage. This predictability makes them appealing to many.
Still, ARMs may offer benefits in certain situations. After all, about 8% of borrowers opt for them over the more common fixed-rate loans.
When to get an ARM loan
Three types of buyers may favor ARMs:
- Short-term homeowners: If relocation is likely within a few years, ARMs may offer savings through low introductory rates while moving before future adjustments become a concern. But, weigh carefully if you’ll actually be able to move out of your starter home as quickly as you intend.
- Property investors: Investors may leverage ARMs for a low initial rate, then may flip the home before adjustment periods kick in or may increase rent during periods of higher interest rates if they’re renting out the property.
- Buyers facing elevated interest levels: During high-interest periods, ARMs might offer a lower rate during the introductory time frame and even the potential for rate reductions down the line if market conditions improve.
ARM mortgages explained
ARMs generally start with low fixed interest periods lasting three to 10 years before shifting into adjustment periods. During the adjustments, your rate will be influenced by factors including:
- Benchmark indices like SOFR: Your ARM will typically be tied to a benchmark, commonly SOFR. This rate reflects the cost for banks to borrow cash overnight. The U.S. Treasury publishes a new SOFR each morning.
- Margins added by lenders: Margins are fixed percentages, which can often range between 2% and 3.5%, added by lenders to whatever benchmark is used for your ARM. The benchmark plus the margin helps determine your mortgage rate. Your specific lender and your credit profile can influence these.
- Rate caps: Adjustment caps limit how much your rate can increase during specific intervals or over the loan’s lifetime. These may involve initial, follow-up, and perpetual limits.
Typical ARM loan structures feature the 5/1 ARM, which has a five-year fixed period followed by yearly rate changes, and the 10/6 ARM, offering a 10-year fixed term before adjustments occur semiannually. Additional mortgage options consist of 3/1, 7/1, and 10/1 adjustable-rate mortgages.
Learn more: How the Secured Overnight Financing Rate could impact your mortgage.
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Switching from an adjustable-rate mortgage to a fixed-rate loan
Circumstances can alter over time. Perhaps you purchased a property with the intention of reselling it quickly, only to discover it was a much better fit for your own long-term living situation. Perhaps you purchased a starter home, only to discover that your plans for moving on wouldn't materialize as swiftly as you'd anticipated. Many people find themselves in the same situation. A significant portion of homeowners from The Millennial and Gen Z demographics are experiencing sticking it out with their starter homes due to financial constraints preventing upgrades.
In these circumstances, it could be advisable to refinance from an adjustable-rate mortgage to one with a fixed interest rate. The procedure for this is quite similar to refinancing from one fixed-rate mortgage to a different one. You'll compare offers from different lenders, provide the necessary application documents, and then use the new loan to fully repay your current one.
Advantages and disadvantages of variable-rate home loans
ARMs, like all mortgage varieties, come with both advantages and disadvantages. Carefully assess them with a reliable loan officer to determine if this mortgage type suits your circumstances best. Here are a few essential points to begin with.
Pros
- Possibility of a more favorable initial interest rate when contrasted with loans that have a set rate.
- Opportunity to lower your monthly payments should the market see improvement and interest rates decline.
- Borrowers could encounter easier qualification requirements with ARMs.
Cons
- Your monthly payments could rise considerably once the initial fixed term concludes.
- Comparing offers is likely to be more complicated than with fixed-rate loans.
- There’s less predictability and stability compared to fixed-rate mortgages.