Mortgage guide
An adjustable-rate mortgage starts with a fixed interest rate for a set number of years, then adjusts on a schedule based on a published market index plus a fixed margin. The starting rate is often lower than a 30-year fixed, which can lower your payment in the early years. After the fixed period, your rate and payment can go up or down, within limits called caps. An ARM fits people who are confident they'll sell, refinance, or pay the loan down before the fixed period ends, and who could handle a higher payment if they don't.
The adjustable-rate mortgage has a bad reputation, mostly left over from 2008. Some of that was earned. A lot of it was about loans that don't exist anymore.
Today's ARMs are a lot more straightforward. They're still not for everyone. Here's how they work, what can go wrong, and how to tell whether one fits you.
An ARM starts with a rate that's locked for a set number of years. During that time, it works just like a fixed-rate mortgage. Your principal and interest stay the same.
ARMs are named with two numbers. The first is how many years the rate is fixed. The second is how often it adjusts after that. On today's conventional ARMs, the second number is usually 6, meaning every six months:
You may still see older names like "5/1," where the rate adjusted once a year. Same idea, different schedule.
When the fixed period ends, the lender looks up the index on a set date and adds your margin. That becomes your new rate, subject to your caps. Your payment is recalculated so the loan still pays off on time.
The index is a published market rate. Most new conventional ARMs today use SOFR, the Secured Overnight Financing Rate, usually as a 30-day average. Older ARMs were often tied to LIBOR, which has been retired and replaced. You don't control the index, and nobody can promise where it will be when your loan adjusts.
The margin is set by the lender when your loan is priced, and it never changes. When you compare ARM offers, the margin matters as much as the starting rate, because it decides your rate for the rest of the loan once the fixed period ends.
Your adjusted rate is the index plus the margin, rounded the way your note says, and limited by your caps.
Caps are the guardrails. There are three kinds:
Cap structures differ by product. A 5/6 ARM may have different caps than a 7/6 or 10/6, so compare the caps in each loan offer. Before you choose an ARM, ask for the worst case: if the index jumps and every cap is hit, what's the highest your payment could be, and when? If that number would break your budget, the ARM isn't for you.
ARMs come with extra disclosures, and they're worth reading:
Your Loan Estimate also shows whether your rate and payment can go up, and the most they can be. Look for that section.
The rate is fixed for 7 years, then adjusts every 6 months for the rest of the loan.
It can, if the index falls when your loan adjusts, within your caps and any floor in your note.
Yes, if you're approved at the time. That's the plan for many ARM borrowers, but nobody can promise it. Rates, your credit, your income, and your home's value all matter on the day you apply.
They carry more payment risk than a fixed rate. Today's ARMs have caps and clear disclosures, and lenders must consider your ability to repay, but you should still be able to afford the worst-case payment.
Yes, both have adjustable options with their own rules. See FHA Loans and VA Loans.
They depend on your credit, down payment, loan type, the ARM structure, and the day your loan is priced. Get a personalized rate quote.
If you're weighing an ARM, let us price it side by side with a 30-year and a 15-year fixed, including the worst-case ARM payment. Get a rate quote or book a call. See Buy a Home and Refinance for the full process.
