Adjustable Rate Mortgages (ARM)

An ARM is a mortgage with an interest rate that may adjust periodically.

Why you should consider an ARM:

  • Lower rate equals lower payments
  • It will allow you to take advantage of falling rates without refinancing
  • It could be cheaper for homeowners who don't plan on living in one place for a very long time 
  • Most consumers refinance every 3-5 years, so it is better if you plan to move, remodel, retire, etc..
  • Real Estate Loan Checklist

An adjustable rate mortgage (ARM) has a fluctuating interest rate after the fixed rate period has expired. For example, a 7/1 ARM means that for the first seven years of your loan, the introductory rate will be fixed (that is the 7 in 7/1). After that, the interest rate can change every year (that is the 1 with rate change in 7/1).

The reason for the fluctuation is that the interest rate moves up or down along with the index it is tied to. The loan will identify which index the ARM follows as well as the rate cap. The rate cap is the amount by which rates and payments can change – this will protect you from steep year-to-year increases.

There are many ARM products to consider:

1-Year ARM features:

  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 6% total rate change over the life of the loan

3/1 Fixed/Adjustable features:

  • Fixed rate for first 3 years, variable for remaining 27 years; review period – 12 months
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 6% total rate change over the life of the loan

5/1 Fixed/Adjustable features: 

  • Fixed rate for first 5 years, variable for remaining 25 years; review period – 12 months
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 5% total rate change over the life of the loan

5/5 Fixed/Adjustable features:  

  • Fixed rate for first 5 years, then adjusts and is fixed for another 5 years. Adjustments occur every 5 years.
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change every 5 years
  • Maximum of 5% total rate change over the life of the loan

7/1 Fixed/Adjustable features: 

  • Fixed rate for first 7 years, variable for remaining 23 years
  • Conforming loans defined up to $750,000 and jumbo loans available
  • Maximum of 2% initial rate change after introductory term
  • Maximum of 2% rate change per year, each additional year
  • Maximum of 5% total rate change over the life of the loan

A fixed rate loan, is one that never adjusts. Now that you know about the differences between an ARM and a fixed rate mortgage, you’re better able to figure out which option works best for your situation.

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NMLS ID #649058. Mortgages available in all 50 states.

*Rate is effective 08/12/2021. 5/5 adjustable rate mortgage payment example: This is a fixed rate loan for the first 5 years then the rate adjusts and is fixed for another 5 years. Adjustments only occur every 5 years with a maturity in 30 years. For a $400,000 loan with a start rate of 2.375% Rate, 2.800% APR (Annual Percentage Rate), for the first 60 months, your estimated fixed payment would be $1,554.61. Your first adjustment will occur at the 61st month. Your rate will be no more than 4.375% with an estimated fixed payment of $1,929.00 for 60 months. Your second adjustment will occur at the 121st month. Your rate will be no more than 6.375% with an estimated fixed payment of $2,275.00. Rates increase no more than 5% above the initial start rate over the life of the loan and a maximum rate of 7.375%, with an estimated maximum payment of $2,421.00. 7/1 adjustable rate mortgage payment example: This is a fixed rate loan for the first 7 years then the rate adjusts every year thereafter with a maturity in 30 years. For a $400,000 loan, with a 2.500% Rate, 2.444% APR, for the first 84 months, your estimated payment would be $1,580.48. Your first adjustment will occur at the 85th month. Your rate will be no more than 4.500% with an estimated fixed payment of $1,930.00. Future adjustments of no more than 2% adjust every 12 months. Your rate will be no more than 7.500% with an estimated maximum fixed payment of $2,496.00. Rates are subject to change without prior notice. Index rate for the Five-Year Treasury Constant Maturity is 0.69%. Index rate for the One-Year Treasury Constant Maturity is 0.06%. The margin is 2.25% - the floor is also 2.25%. Index and margin rates are accurate as of August 12, 2021. For Refinance only on Primary residence and second home. Purchase, Construction and Land Loans are not available for this loan product. Investment property does not qualify for this loan product. Both conforming loan programs and jumbo programs available. You will only pay for pre-paid items such as impounds (for taxes), homeowner’s insurance, along with pre-paid interest and prorations. Taxes and insurance are not included in the payment shown, the payment may be higher.