Consider consulting with a professional financial advisor to review the mortgage options for your specific situation. The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. If you’re buying a short-term home and plan to move away or upsize in a few years, an ARM could save you money. You could benefit from the lower rate and payment, then sell your home before the rate adjusts. An ARM can also be helpful in a rising-rate market where high fixed rates are pricing buyers out of the homes they wanted. Buying a home requires more than just saving up to get a mortgage and finding your perfect home.

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• After that point, your rate adjusts once per year for the rest of your loan term.
• Rate caps limit how much the interest rate can increase at each adjustment period and over the life of the loan.
• Yes, their favorable introductory rates are appealing, and an ARM could help you to get a larger loan for a home.
• Then, your rate adjusts annually for the remainder of your loan’s term.

Cons of an ARM

An adjustable-rate mortgage, or ARM, is a home loan that has an initial, low fixed-rate period of several years. After that, for the remainder of the loan term, the interest rate resets at regular intervals. When you get a mortgage, you can choose a fixed interest rate or one that changes. Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over. Fixed-rate mortgages make up almost the entire mortgage market when rates are low.

• In this situation, you might want to consider giving yourself a bigger buffer, such as getting a 10/6 ARM.
• If something looks different from what you expected, ask your lender why.
• An adjustable-rate mortgage, or ARM, is a home loan that has an initial, low fixed-rate period of several years.
• The best mortgage rate for you will depend on your financial situation.
• The offers that appear on this site are from companies that compensate us.
• The interest rate and payment on an adjustable-rate mortgage can increase substantially over time.
• 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.

Pros and cons of adjustable-rate mortgages

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.

• Adjust the graph below to see historical mortgage rates tailored to your loan program, credit score, down payment and location.
• But because the rate changes with ARMs, you’ll have to keep juggling your budget with every rate change.
• Your lender will also have rate caps in place that will determine how much your rate can increase each period and how high your rate can go over the life of your loan.
• Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months.
• They come in handy, especially when rates rise rapidly — as they have the past year.

Pros And Cons Of An Adjustable-Rate Mortgage (ARM)

Fixed and adjustable-rate mortgages choosing depends on your financial goals and risk tolerance. Fixed-rate mortgages offer stable interest rates and predictable monthly payments, ideal for long-term planning and security. Adjustable-rate mortgages (ARMs), on the other hand, start with lower initial interest rates, which can adjust periodically based on market conditions.

Pros and cons of an adjustable-rate mortgage (ARM)

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• Once the ARM’s fixed-rate period ends, changes happen periodically and what you pay one month could increase the next month.
• Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months.
• But because the rate changes with ARMs, you’ll have to keep juggling your budget with every rate change.
• The initial interest rate on an adjustable-rate mortgage is sometimes called a “teaser” rate, and ARMs themselves are sometimes referred to as “teaser” loans.
• The stable rate and payment make FRMs a safer option for homeowners because they never risk their payments rising and becoming unaffordable.
• A mortgage calculator can show you the impact of different rates and terms on your monthly payment.

Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months. The best way to get an idea of how an ARM can adjust is to follow the life of an ARM. For this example, we assume you’ll take out a 5/1 ARM with 2/2/6 caps and a margin of 2%, and it’s tied to the Secured Overnight Financing Rate (SOFR) index, with an 5% initial rate. Borrowers have many options available to them when they want to finance the purchase of their home or another type of property. While the former provides you with some predictability, ARMs offer lower interest rates for a certain period before they begin to fluctuate with market conditions.

More on current mortgage rates

• That’s because ARM intro rates are typically lower than fixed rates.
• For this example, we assume you’ll take out a 5/1 ARM with 2/2/6 caps and a margin of 2%, and it’s tied to the Secured Overnight Financing Rate (SOFR) index, with an 5% initial rate.
• Before getting an ARM, you should also get an idea of where rates might head in the coming years.

If you keep the same loan with the same lender, your mortgage payment won’t change. An ARM, sometimes called a variable-rate mortgage, is a mortgage with an interest rate that changes or fluctuates during your loan term. Other loans typically have a fixed rate, where the interest rate doesn’t change over the life of the loan.

Key features of adjustable-rate mortgages

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.

Why ARMs are popular right now

Conforming loans are those that meet the standards of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. They are packaged and sold off on the secondary market to investors. Nonconforming loans, on the other hand, aren’t up to the standards of these entities and aren’t sold as investments. “For those expecting a dramatic drop in 30-year mortgage financing rates, 2025 is probably not the year,” says Ken Johnson, Walker Family chair of Real Estate for the University of Mississippi. “As expected, the Fed lowered rates again by 0.25 percent — it also lowered its expectations for rate cuts in 2025,” says Melissa Cohn, regional vice president of William Raveis Mortgage.

How to qualify for an adjustable-rate mortgage

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 arm rates today 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.

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It’s possible for your ARM rate to go down if interest rates fall and then your rate adjusts. ARM rates are much more likely to increase when they adjust than to decrease. An adjustable-rate mortgage is a great tool for many home buyers, but it also comes with serious risks that borrowers need to be prepared for. It can be, especially if they plan to sell or refinance before the initial fixed-rate period ends. Rate caps limit how much the interest rate can increase at each adjustment period and over the life of the loan.

Pros and Cons of Fixed-Rate Mortgages

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.

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 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.

• With a traditional fixed-rate mortgage, you’ll pay a portion of the principal and some of the interest every month but the total payment you make never changes.
• If you check the respective index and see trends are going up or down, you’ll have a good idea whether your rate will increase or decrease at the next adjustment point.
• The primary risk of ARMs is the potential for significant increases in monthly payments if interest rates rise.
• With these options, you’ll pay the same rate for the first five or seven years of the loan.
• The offers that appear on this site are from companies that compensate us.
• ARMs offer flexibility, allowing homeowners to benefit from lower initial rates and potentially lower payments if market rates decrease.
• The period after which the interest rate can change can vary significantly—from about one month to 10 years.

Is an Adjustable-Rate Mortgage Right For You?

The fact that payments remain the same provides predictability, which makes budgeting easier. Not every lender offers adjustable-rate mortgages, and those that do may not have the exact terms you’re looking for. 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. An adjustable-rate mortgage is a home loan with a variable interest rate. This means your ARM rate can change every few months or annually, depending on your terms.

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.

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ARM loan guidelines require a 5% minimum down payment, compared to the 3% minimum for fixed-rate conventional loans. Always read the adjustable-rate loan disclosures that come with the ARM program you’re offered to make sure you understand how much and how often your rate could adjust. ARMs have been around for several decades, with the option to take out a long-term house loan with fluctuating interest rates first becoming available to Americans in the early 1980s. Unlike fixed-rate borrowers, you won’t have to make a trip to the bank or your lender to refinance when interest rates drop.

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.

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They’re advantageous in certain situations, but compared to their fixed-rate counterparts, their unique interest rate structure can be difficult for some borrowers to understand. Eligible military borrowers have extra protection in the form of a cap on yearly rate increases of 1 percentage point for any VA ARM product that adjusts in less than five years. Previous attempts to introduce such loans in the 1970s were thwarted by Congress due to fears that they would leave borrowers with unmanageable mortgage payments.

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

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.

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.

Bankrate follows a stricteditorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. An adjustable-rate mortgage (ARM) is a type of home loan that offers a low fixed rate for the first few years, after which your interest rate and payment can move up or down with the market. With an I-O home loan, you’ll have smaller monthly payments that increase over time as you eventually start to pay down the principal balance. The longer your I-O period, the larger your monthly payments will be after the I-O period ends. With a fixed-rate loan, you’ll pay one set amount every month for the duration of your loan term, like 15, 20 or 30 years.

An adjustable-rate mortgage makes sense if you have time-sensitive goals that include selling your home or refinancing your mortgage before the initial rate period ends. You may also want to consider applying the extra savings to your principal to build equity faster, with the idea that you’ll net more when you sell your home. Before the 2008 housing crash, lenders offered payment option ARMs, giving borrowers several options for how they pay their loans. The choices included a principal and interest payment, an interest-only payment or a minimum or “limited” payment. As mentioned above, a hybrid ARM is a mortgage that starts out with a fixed rate and converts to an adjustable-rate mortgage for the remainder of the loan term. The loan starts with a fixed interest rate for a few years (usually three to 10), and then the rate adjusts up or down on a preset schedule, such as once per year.

If broader interest rates decline, the interest rate on a fixed-rate mortgage will not decline. If you want to take advantage of lower interest rates, you would have to refinance your mortgage, which will entail closing costs. Before getting an ARM, you should also get an idea of where rates might head in the coming years.

Some ARMs have the potential to leave you in negative amortization, which means that even when you’re making payments, they’re not enough to cover the interest on your loan. This happens when your rate increases, taking your payment higher than your loan’s payment cap. After the fixed-rate period expires, your rate will start to adjust depending on where the index is at the time.

On top of that, the lender will also add its own fixed amount of interest to pay, which is known as the ARM margin. In many cases, ARMs come with rate caps that limit how much the rate can rise at any given time or in total. For example, if the index is 5% and the margin is 2%, the interest rate on the mortgage adjusts to 7%. However, if the index is at only 2%, the next time that the interest rate adjusts, the rate falls to 4% based on the loan’s 2% margin. ARMs may offer you flexibility, but they don’t provide you with any predictability as fixed-rate loans do.

But payments will balloon later on, and when this happens you will still have the full loan balance to pay off. Keep in mind that adjustable mortgage rate don’t always increase. If the index rate to which your loan is tied has fallen by the time your loan adjusts, your rate and payment also have to potential to go down. The initial period of an ARM where the interest rate remains the same typically ranges from one year to seven years. An ARM may make good financial sense if you only plan to live in your house for that amount of time or plan to pay off your mortgage early, before interest rates can rise. While there are rate caps in place to protect you, that doesn’t mean your rate and payment can’t increase significantly over time.