Should I choose an ARM or fixed-rate mortgage?

It all comes down to your personal financial goals. Compared to 30-year fixed-rate mortgages, ARMs typically have lower introductory rates. If you plan to sell your home, pay off the loan or refinance before the fixed-portion of the ARM expires, you might save significantly with an ARM. If you’re comparing ARM rates to shorter-term fixed-rate options, you might find that those rates are about the same. The difference is that with 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. In this scenario, an ARM might be a smart move if you don’t plan to stay in the house long-term or plan to refinance before the fixed period ends.

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) Be aware that your monthly payments won’t necessarily go down (or up) right away if there is a drop in interest rates. Some lenders may hold on to 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.

ARM loan requirements

ARM loans have a few requirements which are similar to other types of mortgages. Loan amount: In 2023, homebuyers can borrow up to $726,200 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 can be harder to secure. Credit history: With a higher credit score, you’re more likely to be approved for a competitive interest rate. Lenders will also look at other factors such as other debt and income. Down payment: It’s ideal to put down a 20 percent down payment so you can avoid PMI (private mortgage insurance), which adds to your monthly mortgage payment. However, most conventional ARM loans allow as little as 5 percent down (with PMI), and government-backed loans such as FHA and VA loans have even lower (or no) requirements.

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: 3/1 ARM: The first three years have a fixed rate followed by a floating rate for the remainder of the loan. 5/1 ARM: The first five years have a fixed rate followed by a floating rate for the remainder of the loan. 7/1 ARM: The first seven 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 a cost-effective mortgage 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. 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.

There are also VA and FHA ARMs which are basically the same loans, with the same qualifications and requirements as their fixed-rate counterparts, but with an adjustable rate. If you know that you won’t keep the home longer than the initial period, 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).

How soon can you refinance an ARM loan?

You typically need to wait six months to a year before refinancing an ARM loan. This common policy, known as “seasoning,” also requires the borrower to have made monthly payments promptly. Keep in mind that you have to pay closing costs on the new loan, so you’ll want to make sure that you can afford to pay them. Take some time to verify that refinancing saves you more than it costs.

ARM loan rates

Written by

Jeff Ostrowski

On Saturday, September 23, 2023, the national average 5/1 ARM APR is 8.16%. The average 10/1 ARM APR is 8.15%, according to Bankrate's latest survey of the nation's largest mortgage lenders.

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Weekly national mortgage interest rate trends
Today's ARM loan rates
What is an ARM loan?
How do adjustable-rate mortgages work?
Pros and cons of an ARM loan
ARM loan FAQs
Refinancing into an ARM

Weekly national mortgage interest rate trends

Current mortgage rates

	30 year fixed	7.59%
	15 year fixed	6.82%
	10 year fixed	6.77%

Current ARM loan interest rate trends

For today, Saturday, September 23, 2023, the national average 5/1 ARM interest rate is 6.61%, up compared to last week’s of 6.53%. The national average 5/1 ARM refinance interest rate is 6.67%, up compared to last week’s of 6.56%.

Whether you're buying or refinancing, Bankrate often has offers well below the national average to help you finance your home for less. Compare interest rates here, then click "Next" to get started in finding your personalized quotes.

We’ve determined the national averages for mortgage and refinance interest rates from our most recent survey of the nation’s largest mortgage lenders. Our own mortgage and refinance interest rates are calculated at the close of the business day, and include annual percentage rates and/or annual percentage yields. The interest rate averages tend to be volatile, and are intended to help consumers identify day-to-day movement.

Today's ARM mortgage and refinance interest rates

Lenders nationwide provide weekday mortgage rates to our comprehensive national survey. Here you can see the latest marketplace average rates for a wide variety of purchase loans. The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence. To learn more, see understanding Bankrate rate averages.

Product	Interest Rate	APR
5/1 ARM	6.61%	8.16%
7/1 ARM	6.81%	8.19%
10/1 ARM	7.13%	8.15%

Rates as of Saturday, September 23, 2023 at 6:30 AM

Product	Interest Rate	APR
5/1 ARM	6.67%	8.01%
7/1 ARM	6.83%	8.15%
10/1 ARM	7.19%	8.15%

What is an adjustable-rate mortgage (ARM)?

Adjustable-rate mortgages, or ARMs, are home loans that come with a floating interest rate. As opposed to fixed-rate mortgages, the interest rate on an ARM changes periodically throughout the life of the loan. Since the rate on ARMs can change, your monthly payment might increase or decrease.

ARMs are structured with a fixed-rate period and a floating-rate period. During the first few years your rate is fixed, but after that period ends, your rate becomes adjustable. For example: With 5/1 or 7/1 ARMs, the first five or seven years of the loan comes with a fixed rate. After that, the rate adjusts once a year. With 5/6 or 7/6 ARMs, the rate changes every six months after the first five or seven years.

Adjustable-rate mortgages are best for:

Homeowners planning to sell their home before the end of the introductory fixed-rate period.
Borrowers looking for a starting monthly payment that’s lower than the payments available with fixed-rate loans.
Those who are convinced interest rates will go down by the time the introductory period ends.
Borrowers who have the financial flexibility to weather higher mortgage payments in the future.

How do adjustable-rate mortgages work?

Adjustable-rate mortgages are loans with an interest rate that changes after an initial fixed period. The most common adjustable-rate mortgage, the 5/1 ARM, has a fixed period of five years at the start of the loan, which usually has a lower interest rate relative to market conditions. After that initial period ends, the /1 represents that the rate will adjust based on the prevailing market rate annually.

Below is an example of how a 5/1 ARM could differ from a traditional 30-year fixed mortgage.

	30-year fixed-rate mortgage	5/1 ARM
Loan principal	$310,000	$310,000
Interest rate	6.73%	5.74%
Initial monthly payment	$2,006	$1,807
Total interest	$412,778	$571,875
Total payments	$722,778	$881,875

*Notes: Interest rates as of April 10, 2023; monthly payments do not include insurance or taxes.

To see what the monthly payments would look like for your loan, check out Bankrate’s ARM or fixed-rate calculator.

Pros and cons of an ARM loan

As with most financial products, ARMs have their benefits and drawbacks. Here are the key things to know:

Pros of an adjustable-rate mortgage

It has lower rates and payments early in the loan term.
Borrowers might be able to qualify for a larger mortgage thanks to lower initial payments.
Borrowers may be able to invest their monthly savings.
It offers a lower-cost option for borrowers who plan to move out of the house before the fixed period ends.

Cons of an adjustable-rate mortgage

Rates and payments can rise significantly over the life of the loan.
Some annual caps don’t apply to the initial loan adjustment, so it may be difficult to swallow that first reset.
These loans are more complex, so borrowers need to be more active and savvy in managing their accounts.

ARM loan FAQs

It all comes down to your personal financial goals. Compared to 30-year fixed-rate mortgages, ARMs typically have lower introductory rates. If you plan to sell your home, pay off the loan or refinance before the fixed-portion of the ARM expires, you might save significantly with an ARM.

If you’re comparing ARM rates to shorter-term fixed-rate options, you might find that those rates are about the same. The difference is that with 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. In this scenario, an ARM might be a smart move if you don’t plan to stay in the house long-term or plan to refinance before the fixed period ends.
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)
Be aware that your monthly payments won’t necessarily go down (or up) right away if there is a drop in interest rates. Some lenders may hold on to 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.
ARM loans have a few requirements which are similar to other types of mortgages.

Loan amount: In 2023, homebuyers can borrow up to $726,200 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 can be harder to secure.

Credit history: With a higher credit score, you’re more likely to be approved for a competitive interest rate. Lenders will also look at other factors such as other debt and income.

Down payment: It’s ideal to put down a 20 percent down payment so you can avoid PMI (private mortgage insurance), which adds to your monthly mortgage payment. However, most conventional ARM loans allow as little as 5 percent down (with PMI), and government-backed loans such as FHA and VA loans have even lower (or no) requirements.
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:
- 3/1 ARM: The first three years have a fixed rate followed by a floating rate for the remainder of the loan.
- 5/1 ARM: The first five years have a fixed rate followed by a floating rate for the remainder of the loan.
- 7/1 ARM: The first seven 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 a cost-effective mortgage 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. 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.
There are also VA and FHA ARMs which are basically the same loans, with the same qualifications and requirements as their fixed-rate counterparts, but with an adjustable rate.

If you know that you won’t keep the home longer than the initial period, 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).
You typically need to wait six months to a year before refinancing an ARM loan. This common policy, known as “seasoning,” also requires the borrower to have made monthly payments promptly. Keep in mind that you have to pay closing costs on the new loan, so you’ll want to make sure that you can afford to pay them. Take some time to verify that refinancing saves you more than it costs.

Refinancing into an ARM

If you want to refinance, you might consider refinancing into an ARM under the following circumstances:

You’re going to sell your home in the next few years. Choose an ARM term strategically so that the adjustment period starts around your target sale date.
You expect your income is going to rise. If so, you can take advantage of the lower rate during the initial period without the risk of being unable to afford the higher payment when the rate resets.
Your top priority is getting a low interest rate today. An ARM might be worth it if you want the lowest rate possible during your first few years of the loan, but you should be comfortable with the likelihood that your payments will rise when the rate resets.

Refinancing into an ARM might not be a good move if any of the following apply to you:

Your income isn’t stable. If you’re self-employed, for example, or your income fluctuates for another reason, you risk not being able to afford higher payments.
You don’t expect to bring in more income. Before committing to an ARM, consider whether your income is likely to increase sufficiently by the time the rate resets.
You won’t break even on refinance closing costs. Just like when you closed on your original mortgage, closing on your new loan will cost you in fees. The savings from a lower payment during the initial period might not outweigh the upfront cost, which can be as high as 5 percent of the amount that you’re refinancing.

ARM loan resources

Written by: Jeff Ostrowski, senior mortgage reporter for Bankrate

Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.