For homebuyers comfortable with some unpredictability in return for a potential low rate, an adjustable-rate mortgage could be a suitable choice. These are especially beneficial for those intending to rent out or flip an investment property, or who anticipate moving before the initial fixed-rate period of the loan concludes.
TL;DR
- Adjustable-rate mortgages (ARMs) offer potential lower initial rates but carry risk of future payment increases.
- ARMs suit buyers planning to move or sell before the fixed period ends, or investors.
- ARM rates adjust based on benchmark indices, lender margins, and rate caps.
- Fixed-rate mortgages are more common, offering payment predictability compared to ARMs.
Continue reading as we explain ARM functionality, evaluate their suitability compared to standard fixed-rate mortgages, and examine ARM interest rates from several leading lenders.
You can see the previous business day’s ARM rates report here.
Mortgage rates for ARM products from leading lenders
As of November 11th, Coins2Day examined the latest available figures. The institutions supplied these sample rates, each derived from particular assumptions concerning a hypothetical borrower's credit standing and geographic area. These estimates might incorporate an assumption of mortgage discount points. Should you decide to apply, be aware that the rate you are offered could differ from the sample rates presented.
| 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 | 6.523% | 6.588% | 6.677% |
| 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 | 6.523% |
| U.S. Bank 7/6 ARM | 6.588% |
| Zillow Home Loans 7/6 ARM | 6.677% |
A 7/6 ARM is one with a fixed rate for seven years, then adjustment periods every six months.
Fixed-rate versus adjustable-rate mortgages
Approximately 92% of all mortgages held by U.S. Households are fixed-rate home loans. A fixed-rate mortgage ensures an unchanging rate throughout the loan's duration, differing from ARMs, whose interest rates may fluctuate after an initial set period. This predictability makes them highly attractive.
Still, ARMs could be a viable option in certain scenarios. Approximately 8% of individuals opt for these loans due to perceived distinct benefits.
ARM loans: When they make sense
Three types of buyers often find ARMs beneficial:
- Starter home buyers: Should you anticipate relocating in the next few years, an ARM could allow you to benefit from a reduced introductory rate, bypassing concerns about subsequent changes since you plan to vacate the property before the initial term expires.
- Investors: Real estate investors who intend to flip a house or rent it out may use ARMs to minimize upfront costs, then sell the property or adjust the rent amount when rates change.
- Buyers facing high-interest markets: During periods of elevated interest rates, ARMs might offer lower upfront costs and may even provide relief later if market conditions improve.
Adjustable-rate mortgages (ARMs) are a type of home loan where the interest rate can change over time.
Adjustable-rate mortgages (ARMs) usually start with a low, fixed interest rate for a set duration, like three, five, seven, or ten years, before the rate begins to change. The elements that influence ARM rates when they adjust are:
- Benchmark indices: ARM rates are often tied to benchmarks like the SOFR. The U.S. Treasury publishes an updated SOFR each day, reflecting the overnight costs faced by banks for borrowing cash.
- Margins: Lenders add margins (fixed percentages) to benchmarks when calculating your ARM’s final rate. These can often range from 2% to 3.5%.
- Caps: Rate caps limit increases during specific intervals or throughout the loan term (e.g., initial adjustment caps, subsequent caps).
Typically, ARMs are structured as 30-year mortgages. Common ARM configurations are the 5/1 and 10/6 models, signifying a fixed interest rate for five years followed by yearly changes, and a fixed rate for ten years with adjustments occurring semi-annually, respectively. Other options include 3/1, 7/1, and 10/1 ARMs.
Learn more: Why the Secured Overnight Financing Rate might matter for your mortgage.
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Switching from an adjustable-rate mortgage to a fixed-rate loan
If your plans change, you can likely decide to refinance into a fixed-rate mortgage. For instance, say you decide to stay in your home longer than you initially thought you would.
Many Millennial and Gen Z homeowners are in the same boat, unable to afford upgrades and facing getting by with their starter homes.
Similar to how one might refinance a fixed-rate mortgage for a better interest rate or to access home equity, moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan requires comparing offers from various lenders, submitting paperwork to verify your eligibility, and settling your current mortgage balance.
ARM pros and cons
ARMs come with positives and negatives you should weigh before applying for this type of mortgage. And, working with a trusted loan officer can help you determine if this is really the right loan type for you. Here are some basics to consider.
Pros
- Chance for a lower rate at first. During the fixed introductory period, you may find an ARM offers you a lower rate than you could get on a fixed-rate mortgage.
- Potential for easier qualification. Some borrowers may find they’re more likely to qualify for an adjustable-rate mortgage than for a fixed-rate loan.
- Possible savings down the road. This is not guaranteed, but if market rates decrease during adjustment periods, your monthly payment might go down accordingly.
Cons
- Possibility for payments to rise. Remember, adjustment periods are dependent on what’s happening with the market. Just like there’s a chance for your rate and thus your monthly payment to go down, the converse could happen.
- Hard to comparison shop. Complex terms can make comparison shopping for a good rate on an ARM more difficult than with common fixed-rate mortgage types.
- Less predictability. Once you take out a fixed-rate mortgage, you’re locked into that rate as long as you have the loan. This can give you a little more stability in terms of monthly payment (though you may still face changes to things like homeowners insurance or your HOA dues). With ARMs, you need a certain level of risk tolerance.