Today's Adjustable-Rate Mortgage Overview: ARM Rates and What Buyers Should Know

For homeowners comfortable with some uncertainty, an adjustable-rate mortgage can offer a lower introductory rate before the interest changes begin. This type of loan may be especially appealing if you plan to rent out the property, flip it, or move before the fixed-rate period ends.

Below, we explain how ARMs work, when they may be a better fit than a fixed-rate mortgage, and how average ARM rates look based on Mortgage Research Center data.

You can also review the prior business day’s ARM rates report.

Average ARM mortgage rates

ARMs come with different setups depending on how long the initial fixed-rate period lasts and how often the rate resets. For instance, a 7/6 ARM keeps the same rate for seven years, then adjusts every six months.

Fortune examined the latest MRC data available.

Fixed-rate vs. adjustable-rate mortgages

Fixed-rate mortgages make up the vast majority of U.S. home loans, representing about 92% of all mortgages. Unlike ARMs, which can change after an introductory period, fixed-rate loans stay the same for the full term, which helps explain their popularity.

Still, ARMs can make sense in certain situations. Roughly 8% of borrowers choose them because of the advantages they can provide.

When an adjustable-rate mortgage may be worth considering

These three groups of buyers often have good reason to look at ARMs:

• Homeowners planning to move soon: If you expect to move within a few years, perhaps because the home is only a starter property, an ARM can give you a lower starting rate without much concern about later resets.
• Real estate investors: Landlords buying rental property, or house flippers planning a quick resale, may use ARMs with the idea of raising rent if rates rise or selling before the first adjustment arrives.
• Buyers facing high rates: When interest rates are elevated, ARMs may offer lower introductory pricing and the possibility of relief later if the market improves.

How adjustable-rate mortgages work

An ARM starts with a fixed introductory rate that often lasts three, five, seven, or 10 years before the loan moves into its adjustment periods. The amount your rate changes can depend on several factors, including:

• Benchmarks such as SOFR: ARM rates are typically tied to a benchmark, often SOFR, which reflects the cost banks pay to borrow overnight money. The U.S. Treasury publishes an updated figure each morning.
• Margins: Lenders add a fixed margin on top of the benchmark to set your ARM rate. These margins often fall between 2% and 3.5%.
• Caps: Caps limit how much the rate can rise at one time or over the life of the loan. You may hear about initial caps, periodic caps, and lifetime caps.

Common ARM structures include 5/1 loans, which have a five-year introductory period followed by annual adjustments, and 10/6 loans, which keep the initial rate for 10 years before resetting every six months. Other common versions include 3/1, 7/1, and 10/1 ARMs.

Check Out Our Daily Rates Reports

Refinancing from an ARM into a fixed-rate mortgage

Plans change. If you end up staying in your starter home longer than expected after taking out an ARM, refinancing into a fixed-rate mortgage may be an option.

You’re not alone in that situation. Many Millennial and Gen Z homeowners are staying in their starter homes because moving up is out of reach.

The refinancing process is broadly similar to refinancing from one fixed-rate loan to another. You compare lenders, submit documents that verify your credit and income, and use the new loan to pay off the old one in full.

Pros and cons of adjustable-rate mortgages

It helps to work with a trusted loan officer when deciding whether this mortgage type fits your needs. Here are some basic points to weigh when evaluating an ARM.

Pros

• Potentially lower initial interest rates than fixed-rate loans.
• Possibly easier qualification standards for some borrowers.
• A chance to save money if rates fall and market conditions improve.

Cons

• Monthly payments may jump once the rate begins adjusting.
• Comparing options can be more complicated than with standard fixed-rate loans.
• Homeowners face more uncertainty than they would with a fixed-rate mortgage.