Adjustable-Rate Mortgages

If you’re a current homeowner or a potential home buyer, chances are that you’ve heard of adjustable-rate mortgages (ARM). Adjustable-rate mortgages are one of the most common types of mortgage loans — the other being the fixed-rate mortgage. Depending on your financial circumstances, timeline and home-buying goals, an ARM loan may be the best choice for you as you embark on your home-buying journey. This article will help you navigate common questions about adjustable-rate mortgages, including the benefits of ARM vs fixed rate loans, loan terms and how to apply for an ARM loan.

What is an Adjustable-Rate Mortgage (ARM)?

As its name indicates, an adjustable-rate mortgage is a home loan with a variable interest rate adjusted based on an index. The interest rate applied to the outstanding balance of an ARM loan can fluctuate over the life of the loan. The interest rates change at set times — for example, the initial interest rate of an ARM loan is locked in for a set amount of time, and then it will reset periodically. The loan’s interest rate can reset on either a monthly or yearly basis, depending on the lender’s terms and what is agreed upon with the borrower. It’s also worth noting that borrowers can enjoy a locked-in interest rate for the initial period of their ARM loan, whether it’s five, seven or ten years.

Get a rate quote
arm loans

ARMs Explained

Given the fluctuating nature of their interest rate, ARM loans may seem complex — and even a little intimidating. You might be wondering how you can benefit from a constantly changing interest rate. You may even be wondering how an ARM loan compares to the traditional fixed-rate loan. By going through the finer points of adjustable-rate mortgage loans, you can gain a larger understanding of their benefits, criteria and terms.

Of course, the defining characteristic of an adjustable-rate mortgage is its ever-changing interest rate. This ongoing adjustment means that borrowers with adjustable-rate loans inevitably may have different mortgage payments over time.

However, as previously mentioned, interest rates may also fluctuate every few months or even yearly. This frequency depends on the lender’s specific terms and what is agreed upon with the borrower. In any case, it’s essential to know that adjustable-rate mortgages aren’t stable long-term. They can make budgeting a challenge since it’s hard to know what your next interest rate will be.

Common ARM Loan Terms

One of the advantages of adjustable-rate mortgages is the ability to lock in a fixed interest rate for a certain amount of time before it starts to fluctuate. This allows for some stability at the outset of the loan, similar to a conventional fixed-rate mortgage loan. There are several different options when it comes to ARM loan terms. Similar to fixed-rate mortgages, they can span 15 or 30 years total (though 30 years is more common). Depending on your goals, timeline and financial situation, you can choose the length of time for fixed-rate interest that best suits you. Take a look at the following loan terms to see which option might be best for you.

5/1 ARM

A 5/1 loan is one of the most common types of adjustable-rate mortgage loans. A 5/1 ARM loan maintains a consistent interest rate for five years and then switches to an adjustable rate for the loan’s remaining life. The initial fixed rate is typically lower than comparable fixed-rate mortgages, making this option even more attractive for home buyers.

Once the ARM loan is out of the initial fixed-rate period, the interest rate may be subject to caps. These determine how much the interest can change in any given period of time. In this way, borrowers do have some level of security when it comes to their interest rates.

7/1 ARM

Yet another option for adjustable-rate mortgages is the 7/1 loan. 7/1 ARM loans can be well-suited to buyers who don’t plan to stay in their new home long-term. In the same way as 5/1 loans, 7/1 loans allow buyers to benefit from a fixed interest rate for seven years before switching to an adjustable interest rate.

In this way, they are an ideal option for short-term buyers who would like to benefit from low interest rates. This ARM loan option can help buyers save money before either putting their home back on the market or transitioning into adjustable interest rates

10/1 ARM

Finally, the 10/1 ARM loan gives borrowers a decade of fixed interest rates before switching to variable interest rates for the remainder of the loan. By choosing a 10/1 ARM loan, borrowers may pay slightly higher fixed rates than with a 5/1 or 7/1 ARM loan.

However, this type of loan still provides borrowers with the opportunity to save money over the first ten years of the loan before transitioning to variable interest. As is the case with all adjustable-rate mortgages, the borrower is subject to rising (or decreasing) interest rates after the initial fixed-rate period is over.

When an ARM is a Good Choice

An adjustable-rate mortgage loan is an ideal choice for buyers who don’t plan to stay in their homes for very long. With lower-than-average interest rates for the first five, seven or ten years, the borrower can save money before switching to a variable interest rate.

With this in mind, if you’re planning to sell your home after just a few years, an ARM loan might be the ideal choice for you. Additionally, buyers who plan to have an increase in income are well-suited to ARM loans. Often, these buyers will be able to refinance their loans before interest rates change.

How to Apply for an ARM

If you’re interested in applying for an adjustable-rate mortgage loan, we encourage you to speak to one of our experts to determine what makes the most sense for your plans and your budget. With years of valuable experience helping buyers just like you secure reasonable ARM mortgage loans, Capital Bank can make the home buying process.

apply for an arm loan