For homeowners comfortable with some unpredictability, an adjustable-rate mortgage could be a worthwhile option to secure a lower initial rate before it changes. This kind of loan might be especially suitable if your plan is to rent out the property for a quick profit or if you anticipate relocating prior to the end of the loan's fixed-rate term.
Continue reading for an explanation of how ARMs function, a discussion on when an ARM might be a suitable alternative to a fixed-rate mortgage, and an examination of ARM rates from several leading lenders.
You can see the previous business day’s ARM rates report here.
Mortgage rates for ARM loans from leading lenders
Coins2Day examined the latest figures up to November 12th. The institutions supplied these sample rates, each derived from particular assumptions concerning a hypothetical borrower's credit standing and geographic area. These estimations might incorporate an assumption of mortgage discount points. Should you decide to apply, be aware that the rate you're 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 | 5.625% | 5.875% | 6.125% |
| APR | 6.465% | 6.536% | 6.669% |
| Interest Rate | |
|---|---|
| Bank of America 7/6 ARM | 5.625% |
| U.S. Bank 7/6 ARM | 5.875% |
| Zillow Home Loans 7/6 ARM | 6.125% |
| APR | |
| Bank of America 7/6 ARM | 6.465% |
| U.S. Bank 7/6 ARM | 6.536% |
| Zillow Home Loans 7/6 ARM | 6.669% |
A 7/6 ARM features a fixed interest rate for the initial seven years, followed by adjustments occurring every six months thereafter.
Fixed vs. Adjustable mortgage rates
Fixed-rate mortgages are the prevalent choice for U.S. Homeowners, accounting for approximately 92% of all residential financing. In contrast to adjustable-rate mortgages (ARMs), where interest rates can fluctuate post-introductory phase, fixed-rate options provide stability over their entire duration, which is a probable reason for their widespread adoption.
However, ARMs offer advantages in certain situations. Approximately 8% of borrowers select them due to their distinct advantages.
Reasons to think about a variable-rate home loan
Three groups of homebuyers can commonly benefit from considering ARMs:
- Homeowners who intend to move soon: Should you anticipate relocating within a few years, possibly because this is your first home, an ARM could allow you to benefit from a low initial rate without concern for subsequent changes.
- Real estate investors: Landlords buying a property to rent out or house flippers intending to sell a property quickly may use ARMs with the intent of adjusting the monthly rent if interest rates increase or selling before the adjustment period kicks in.
- Buyers in high-interest environments: During times of elevated interest rates, ARMs can sometimes offer lower rates during the introductory period, and the potential for relief later if market conditions improve.
ARM loans explained
ARMs begin with an introductory fixed rate that often lasts three, five, seven, or 10 years before the loan transitions into its adjustment periods. How much your rate changes during an adjustment period can depend on a variety of factors, including:
- Benchmarks like SOFR: An ARM’s rate is typically tied to a benchmark, commonly SOFR. This particular benchmark reflects the cost for banks to borrow money overnight. The U.S. Treasury publishes an updated each morning.
- Margins: Fixed margins are added by lenders on top of the benchmark to determine your ARM rate. These can often range between 2% to 3.5%.
- Caps: Adjustment caps limit how much rates can increase at specific intervals or over time. You may hear about initial adjustment caps, subsequent caps, and lifetime caps.
Common ARM formats include 5/1 (an introductory rate that lasts for five years followed by annual adjustments) and 10/6 (a 10-year intro period followed by adjustments every six months) structures. Other structures on the market include 3/1 ARMs, 7/1 ARMs and 10/1 ARMs.
Learn more: Why the Secured Overnight Financing Rate might matter for your mortgage.
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ARM to Fixed Mortgage Refinance
Life happens. Plans change. If it turns out you’re going to be in your starter home longer than expected, and you initially took out an ARM, you might opt to refinance to a fixed-rate loan.
First, know you’re not alone. A large chunk of Millennial and Gen Z homeowners can’t afford to upgrade and are continuing on in their starter homes
To refinance from an ARM to a fixed-rate mortgage, the process is more or less the same as refinancing from one fixed-rate loan to another. You’ll shop around with various lenders, provide the application documents necessary to show your credit profile and income meet the lender’s requirements, and you’ll use the new loan to pay your old one off in full.
ARM pros and cons
Work with a trusted loan officer to ensure you’re selecting the best mortgage type for your needs. To get you started, here are some basic factors to consider in evaluating if an ARM is right for you.
Pros
- Possibly lower initial rate compared with fixed-rate loans.
- Potentially easier qualification standards for some borrowers.
- Chance to save if market conditions improve and rates go down.
Cons
- Payments could spike after adjustments begin.
- Comparing offers is more complex than with common fixed-rate loans.
- Homeowners face more unpredictability than with a fixed-rate loan.