ARM Loan Rates

Today's ARM Loan Rates

What is an ARM loan?

Adjustable-rate mortgages or ARMs are home loans that come with a floating interest rate. In other words, the interest rate can change periodically throughout the life of the loan, unlike fixed-rate mortgages.

Since the rate on ARMs can increase or decrease, your monthly payment can too. ARMs are structured with a fixed-rate period and a floating-rate period. During the first few years your rate is fixed after that period ends your rate becomes adjustable. These are typically called 5/1 or 7/1 ARMs, which signify that the first five or seven years of the loan will have a fixed rate.

The time between rate changes — called the adjustment period — will appear in the fine print, so you’ll know exactly when it may go up or down. Typically, ARM interest rates adjust annually after the initial fixed period.

ARM loan vs. fixed-rate loan

There are pros and cons of both ARMs and fixed-rate mortgages. Your financial goals will dictate which one makes sense for you.

ARMs generally have lower introductory rates compared with 30-year fixed-rate mortgages. So, for someone who plans to sell their house, pay off the loan or refinance before the fixed-portion of the ARM expires (see above), then an ARM might be a cheaper option.

If you’re comparing ARM rates to shorter-term fixed-rate options, then you might find that those rates are about the same. The difference is that with the ARMs you can spread the payment over 30 years, so you can get a low rate (on par with a 10-year fixed-rate mortgage) without the high monthly costs. The ARM option, in this scenario, might make sense if you don’t plan on staying in the house long-term.

Do ARM loans have a rate cap?

A rate cap puts a limit on how much your interest rate can go up.

There are two types of caps:

• Period adjustment cap: how much your rate can go up or down within an adjustment period
• Lifetime cap: limits rate increase throughout the lifetime of the loan (by law ARMs must have a lifetime cap)

Keep in mind that a drop in interest rates doesn’t mean your monthly payments go down (or up) right away. Some lenders may hold onto some or all of the rate decline and move it over to the next adjustment period — referred to as a carryover.

For example, if your rate cap is 1 percentage point and interest rates went up by 2 percent, your lender can hold onto the “extra” 1 percent and increase your monthly payment in the future even if the index rate hasn’t gone up.

Any there any requirements associated with ARM loans?

ARM loans have a few requirements which are similar to other types of mortgages.

Loan amount Typically, homeowners can borrow up to $510,400 for a conforming ARM (limits may be higher in areas with higher home prices). You can take on a jumbo ARM which exceeds the conforming loan limit, though both these types of loans will depend on your creditworthiness.

Credit history The higher your credit score, the more likely you’ll be approved for a loan with competitive interest rates. Lenders will also look at other factors such as your payment history, other loans and income.

Down payment Ideally, you’ll want to put down a 20 percent down payment to avoid PMI (private mortgage insurance) but most conventional ARM loans allow as little as a 5 percent down payment. Government backed loans such as FHA or VA loans may have even lower minimum down payment requirements.

What are the different types of ARM loans?

The most common types of ARMs are also known as hybrid ARMs. These have initial fixed-rate periods followed by a floating rate for the remainder of the loan. Hybrid ARMs include:

• 5/1 ARM- The first 5 years have a fixed rate followed by a floating rate for the remainder of the loan.
• 7/1 ARM- The first 7 years have a fixed rate followed by a floating rate for the remainder of the loan.
• 10/1 ARM- The first 10 years have a fixed rate followed by a floating rate for the remainder of the loan.

Usually, 5/1 ARMs have the lowest interest rate of the bunch. For those who think they’ll refinance or sell within five years, this could be the most cost-effective option.

Of course, it’s also a gamble. If your income or credit situation changes for the worse, you might not be able to refinance. And, if you can refinance, you might end up with a higher rate than if you would have gotten a fixed-rate loan in the first place.

Planning to sell your home could also hit speed bumps, which means you could be paying a higher adjustable rate longer than you expected. Of course, the rate could fall as well.

VA and FHA ARMs

There are also VA and FHA ARMs which are basically the same loans, with the same qualifications and requirements, but with an adjustable rate.

The only advantage to a VA or FHA ARM is that the interest rate is lower (during the initial period) than a fixed-rate VA or FHA mortgage.

If you know that you won’t keep the house longer than the initial period than you could end up saving money. If you stay with an ARM past the fixed-rate period, you run the risk of your rate rising (it could also fall if rates drop).