Rate option
Adjustable-Rate Mortgage (ARM)
A lower starting rate for a fixed period, then a rate that adjusts with the market. Best when you don't plan to stay forever.
- Lower initial rate
- Fixed for 1 to 10 years
- Rate caps limit adjustments
An adjustable-rate mortgage starts with an interest rate that's fixed for an initial period, commonly 5, 7, or 10 years, then adjusts periodically based on market conditions. Because the initial rate is usually lower than a comparable fixed-rate loan, ARMs can lower your payment in the early years or help you qualify for a bit more home.
After the fixed period, the new rate is calculated by adding a margin (typically 1.75% to 3.5%) to a published index, then rounding to the nearest eighth of a percent. Most ARMs are amortized over 30 years.
How an ARM works
Initial fixed period
A 5/1 or 7/6 ARM, for example, holds the rate steady for 5 or 7 years before the first adjustment.
Index plus margin
After the fixed period, your rate equals a market index (such as SOFR) plus your loan's margin.
Rate caps
Caps limit how much the rate can rise at the first adjustment, at each later adjustment, and over the life of the loan.
Lower starting payment
The discounted initial rate can mean real savings if you sell or refinance before the loan adjusts.
Who it’s a good fit for
- Buyers who expect to move or refinance within the fixed period
- Borrowers who want a lower payment in the early years
- Anyone comfortable with some payment variability in exchange for a lower initial rate
A quick example of rate caps
Say you have a 3/1 ARM with a 6.25% start rate, a 2% cap on the first adjustment, and a 6% lifetime cap. In year four the rate could rise to at most 8.25%, and over the life of the loan it can never exceed 12.25%. We'll show you the worst case for any ARM before you choose one.
Common questions
Is an ARM risky?
It carries more uncertainty than a fixed rate, but caps limit how far the rate can move. The key question is how long you plan to keep the loan. If you'll likely sell or refinance before the first adjustment, an ARM can be a smart way to save.
Can I convert an ARM to a fixed rate later?
Some ARMs include a conversion option. Otherwise, you can refinance into a fixed-rate loan at any time, subject to qualifying at that point.
Ready to explore a adjustable rate loan?
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