Rates remain elevated Today’s mortgage rates, January 2, 2025

An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

Get answers to your adjustable-rate mortgage questions

• In this example, the mortgage term is 30 years, the principal is $100,000, and the interest rate is 6%.
• Yes, you can refinance your ARM to a fixed-rate loan as long as you qualify for the new mortgage.
• Ask each lender to explain what kind of interest rate cap structure it uses for its ARMs as you shop around.
• Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two types of mortgages that have different interest rate structures.
• You could benefit from the lower rate and payment, then sell your home before the rate adjusts.
• With an ARM, the initial interest rate is fixed for a period of time.
• The traditional 30-year fixed-rate mortgage is the most common type of home loan, followed by the 15-year fixed-rate mortgage.

A fixed-rate mortgage is a type of home loan where the interest rate remains constant throughout the entire term of the loan. This means that the monthly payments for principal and interest will not change, providing stability and predictability for homeowners. If you’re confident you’ll be moving before the fixed-rate period ends, an ARM could be a great choice. You’ll enjoy the perks of a cheaper introductory rate and payment, and then move before your low rate expires. If your plans change and you no longer plan to move, refinancing to a fixed-rate mortgage could be a viable option.

What are the requirements for an adjustable-rate mortgage?

One drawback is that fixed-rate mortgages often have higher initial interest rates compared to adjustable-rate mortgages. Additionally, if market interest rates decline, homeowners with fixed-rate mortgages will not benefit from the lower rates unless they refinance their loans. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first.

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• Opting to pay the minimum amount or just the interest might sound appealing.
• But payments will balloon later on, and when this happens you will still have the full loan balance to pay off.
• Using the 5/1 ARM example, after your fixed rate expires, your interest rate could adjust up or down once each year.
• An ARM has a variable interest rate, while a fixed-rate mortgage has a constant rate for the entire loan term.
• Some of the most common terms are 5/1, 7/1, and 10/1 ARMs, but many lenders offer shorter or longer intro periods.
• If interest rates in general fall, then homeowners with fixed-rate mortgages can refinance, paying off their old loan with one at a new, lower rate.
• This type of mortgage can be a more affordable means to get into a home, especially when higher rates on fixed mortgages are beginning to price some borrowers out.

The most obvious advantage is that a low rate, especially the intro or teaser rate, will save you money. Not only will your monthly payment be lower than most traditional fixed-rate mortgages, but you may also be able to put more down toward your principal balance. Just ensure your lender doesn’t charge you a prepayment fee if you do. In most cases, you can choose the type of mortgage loan that best suits your needs.

• These adjustments are based on a market index—the Secured Overnight Financing Rate (SOFR) being the most common for adjustable-rate products—that your lender uses to set and follow rates.
• If you’re confident you’ll be moving before the fixed-rate period ends, an ARM could be a great choice.
• If you cannot afford your payments, you could lose your home to foreclosure.
• When housing values took a nosedive, many homeowners ended up with underwater mortgages — loan balances higher than the value of their homes.
• An ARM has a variable interest rate, while a fixed-rate mortgage has a constant rate for the entire loan term.
• However, the deterioration of the thrift industry later that decade prompted authorities to reconsider their initial resistance and become more flexible.
• This allows you to pay lower monthly payments until you decide to sell again.
• Shorter adjustment periods generally carry lower initial interest rates.

FAQs on adjustable-rate mortgages

Then, the rate adjusts every year after that, which is what the second number indicates. One of the major cons of ARMs is that the interest rate will change. This means that if market conditions lead to a rate hike, you’ll end up spending more on your monthly mortgage payment. ARMs are great for people who want to finance a short-term purchase, such as a starter home. Or you may want to borrow using an ARM to finance the purchase of a home that you intend to flip.

• Mortgages allow homeowners to finance the purchase of a home or other piece of property.
• Not every lender offers adjustable-rate mortgages, and those that do may not have the exact terms you’re looking for.
• Most mainstream ARM loan payments include both principal and interest.
• Some ARMs are structured so that interest rates can nearly double in just a few years.
• But after that point, the interest rate that affects your monthly payments could move higher or lower, depending on the state of the economy and the general cost of borrowing.
• The average rate on a 5/1 adjustable rate mortgage is 6.25 percent, ticking up 4 basis points over the last week.
• Adjustable-rate mortgages, or ARMs, are an alternative choice to conventional mortgages.

Low Initial Fixed Rate

This allows you to pay lower monthly payments until you decide to sell again. ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin. The primary benefit of a fixed-rate mortgage is the stability it offers.

Definition of an adjustable-rate mortgage

The graphic below shows how rate caps would prevent your rate from doubling if your 3.5% start rate was ready to adjust in June 2023 on a $350,000 loan amount. Fixed-rate mortgages offer interest rate stability over the life of the loan, providing predictable monthly payments and long-term financial planning security. So with a 5/1 ARM, you have a 5-year intro period and then 25 years during which your rate and payment can adjust each year. Note that modern adjustable-rate mortgages come with interest rate caps that limit how high your rate can go, so the cost can’t just increase every year for 25 years. Regardless of the loan type you select, choosing carefully will help you avoid costly mistakes. Weight the pros and cons of a fixed vs. adjustable-rate mortgage, including their initial monthly payment amounts and their long-term interest.

Fixed-Rate Mortgages

After all, why wouldn’t you lock in an ultra-affordable rate and payment for the life of the loan? However, ARM loans often grow in popularity when rates are rising. That’s because ARM intro rates are typically lower than fixed rates. This can help borrowers lower their costs and the outset and potentially afford more expensive homes on the same budget. The caps on your adjustable-rate mortgage are the first line of defense against massive increases in your monthly payment during the adjustment period. They come in handy, especially when rates rise rapidly — as they have the past year.

What is a mortgage rate?

Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. In a volatile market, mortgage rates can rise swiftly and with little warning.

Potential for lower payments

There are various features that come with these loans that you should be aware of before you sign your mortgage contracts, such as caps, indexes, and margins. It’s also possible to secure an interest-only (I-O) ARM, which essentially would mean only paying interest what is adjustable rate mortgage on the mortgage for a specific time frame, typically three to 10 years. Once this period expires, you are then required to pay both interest and the principal on the loan. Mortgages allow homeowners to finance the purchase of a home or other piece of property.

A 5/5 ARM is a mortgage with an adjustable rate that adjusts every 5 years. During the initial period of 5 years, the interest rate will remain the same. After that, it will remain the same for another 5 years and then adjust again, and so on until the end of the mortgage term. A major advantage of an ARM is that it generally has cheaper monthly payments compared to a fixed-rate mortgage, at least initially.

Pros of an Adjustable-Rate Mortgage

Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Adjustable-rate mortgages, on the other hand, have fluctuating interest rates.

• This is different from a fixed-rate mortgage, which locks in your rate for the entire life of your loan.
• You can use those extra funds to pay off other debt, invest in your future or make larger payments on your mortgage principal to pay off the loan faster.
• Monthly payments on a 5/1 ARM at 6.25 percent would cost about $616 for each $100,000 borrowed over the initial five years.
• If you don’t think you can comfortably afford the new monthly payment once the adjustment goes through, you may have to cut costs in other areas.
• Not every lender charges prepayment penalties, and the length of time for the penalty may vary.
• This means that there are limits on the highest possible rate a borrower must pay.
• It’s also important to understand how adjustable mortgage rates work when it comes time for your rate to adjust.
• If broader interest rates decline, the interest rate on a fixed-rate mortgage will not decline.

The main benefit of an ARM is the lower initial interest rate, which can result in lower monthly payments during the initial period. This can make ARMs attractive for buyers who plan to sell or refinance before the adjustable period begins. ARMs typically start with a lower initial interest rate compared to fixed-rate mortgages.

If interest rates are high and expected to fall, an ARM will help you take advantage of the drop, as you’re not locked into a particular rate. If interest rates are climbing or a predictable payment is important to you, a fixed-rate mortgage may be the best option for you. A borrower who chooses an ARM could potentially save several hundred dollars a month for the initial term. Then, the interest rate may increase or decrease based on market rates.

What Is An Adjustable-Rate Mortgage?

Not every lender charges prepayment penalties, and the length of time for the penalty may vary. Before choosing an ARM, be sure to ask your lender if you would incur any penalties should you decide to pay your loan off early. The table below is updated daily with current mortgage rates for the most common types of home loans. Adjust the graph below to see historical mortgage rates tailored to your loan program, credit score, down payment and location. The 30-year mortgage, which offers the lowest monthly payment, is often a popular choice. However, the longer your mortgage term, the more you will pay in overall interest.

Lower initial payments can help you more easily qualify for a loan. ARM rates are often (but not always) lower than 30-year fixed rates. This means that while you’re in the fixed-rate period of your ARM, you could have a lower monthly payment, giving you more space in your budget for other necessities. ARMs generally have lower interest rates, at least initially, compared to fixed-rate mortgages.

Should you get an adjustable-rate mortgage?

If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments. For example, a 2/28 ARM features a fixed rate for two years followed by a floating rate for the remaining 28 years. In comparison, a 5/1 ARM has a fixed rate for the first five years, followed by a variable rate that adjusts every year (as indicated by the number one after the slash). Likewise, a 5/5 ARM would start with a fixed rate for five years and then adjust every five years.

See the table below for a detailed breakdown of how each loan type moved. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Two key factors known as “index” and “margin” determine your ARM’s interest rate. When interest rates are falling, the interest rate on an ARM mortgage will decline without the need for you to refinance the mortgage. To make sure you can repay the loan, some ARM programs require that you qualify at the maximum possible interest rate based on the terms of your ARM loan. Another key characteristic of ARMs is whether they are conforming or nonconforming loans.

The interest rate on an ARM adjusts periodically, typically once a year after the initial fixed-rate period. With an ARM, your rate stays the same for a certain number of years, called the “initial rate period,” then changes periodically. For example, if you have a 5/1 ARM, your introductory rate period is five years, and then your rate will go up or down every year. This means even if mortgage rates are on the rise and you’re set to get an increase, it won’t go up an exorbitant amount. Ask each lender to explain what kind of interest rate cap structure it uses for its ARMs as you shop around. Because ARM rates can potentially increase over time, it often only makes sense to get an ARM loan if you need a short-term way to free up monthly cash flow and you understand the pros and cons.

Rate adjustment periods define how often the interest rate on an ARM can change after the initial fixed period. Common adjustment periods include annually (1-year ARM) or every six months. The terms of the rate adjustment are outlined in the mortgage contract. Most mainstream ARM loan payments include both principal and interest. The only time you won’t pay principal on an ARM is if you opt for a special product like an interest-only or payment-option ARM. These can offer a lower payment that covers just the interest, or possibly not even all the interest due, for a period of time.

They can help you navigate the complexities of mortgage options and make the best decision for your needs. When fixed-rate mortgage rates are high, lenders may start to recommend adjustable-rate mortgages (ARMs) as monthly-payment saving alternatives. Homebuyers typically choose ARMs to save money temporarily since the initial rates are usually lower than the rates on current fixed-rate mortgages.

Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can rise or fall. Unlike ARMs, traditional or fixed-rate mortgages carry the same interest rate for the life of the loan, which might be 10, 20, 30, or more years.

Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. Life doesn’t always go as planned, and staying in the home for an extra few years could end up costing you if your rate goes up before you’re able to sell. In this situation, you might want to consider giving yourself a bigger buffer, such as getting a 10/6 ARM. Use our interactive Loan Estimate to double-check that all the details about your loan are correct. If something looks different from what you expected, ask your lender why.

It also includes finding the right type of mortgage that’s best for your budget—loan term, interest rate and monthly payment all play a factor in what you can reasonably afford. An adjustable-rate mortgage (ARM) might be something to consider as you’re exploring different borrowing options. The monthly payments for shorter-term mortgages are higher so that the principal is repaid in a shorter time frame.

This allows them to still afford the home they want without having to compromise due to higher rates. With a rate cap structure of 2/2/5, your rate could increase up to 5% at its first adjustment; as high as 7% at its second adjustment; and no higher than 8% over the entire life of the loan. The first number is how long the interest rate is fixed and the second number is how frequently that rate changes after the initial period. For instance, using our same example from above, a 5/1 ARM means the rate is fixed for five years and then variable every year after that. Based on the terms you agreed to with your mortgage lender, your payment could change from one month to the next, or you might not see a change for many months or even years.

Rates will depend on your mortgage lender, but in general, lenders reward a shorter initial rate period with a lower intro rate. Whether an adjustable-rate mortgage is the right choice for you depends on how long you plan to stay in the home, rate trends, your monthly budget, and your level of risk tolerance. Some of the most common terms are 5/1, 7/1, and 10/1 ARMs, but many lenders offer shorter or longer intro periods. Some ARMs, such as 5/6 or 7/6 ARMs, adjust every six months rather than once per year. This is usually a few years —  anywhere from three to 10 — and your rate and payment will stay the same for that entire period.