Current 3/1 ARM rates

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A 3/1 ARM, or adjustable-rate mortgage, is a 30-year, fully-amortizing mortgage with a low, fixed introductory rate for the first three years. After this fixed period, the rate becomes variable, changing once per year.

The variable rate is tied to a benchmark, typically the Secured Overnight Financing Rate (SOFR). This rate moves based on what’s happening in the economy in the U.S. and abroad, and how the Federal Reserve and other central banks are responding to those trends.

Along with the variable rate, ARMs have rate caps that limit how much the rate can change. These often include:

• An initial rate cap: Limits how much the interest rate can change after the introductory period
• A periodic rate cap: Limits how much the interest rate can change from one year to the next
• A lifetime rate cap: Limits how much the interest rate can rise over the life of the loan
• A payment cap: Limits the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points

Here’s an example of how the payments during the initial period of a 3/1 ARM differ from those with a 30-year fixed mortgage:

While 3/1 ARM structures can vary, they all usually have rate caps. These might include an initial rate cap, a periodic rate cap and a lifetime rate cap.

To qualify for a conventional ARM, you’ll generally need to meet these requirements:

• A minimum credit score of 620
• A debt-to-income (DTI) ratio of no more than 45 percent
• A minimum down payment of 5 percent

With ARMs, mortgage lenders take into account your ability to make a higher monthly payment if interest rates rise. This can make them more difficult to qualify for than a fixed-rate loan for the same amount.

Refinancing an ARM works like refinancing any other mortgage. There are two major reasons to refinance your ARM:

• Lower your rate and/or change your loan term length
• Take cash out of your equity

It might make sense to refinance your ARM before the first rate adjustment. You can refinance an ARM to another ARM or a fixed-rate mortgage.

Just remember that refinancing isn’t free. You’ll have to pay closing costs, either upfront or financed with the new mortgage.