An adjustable-rate mortgage (ARM) is a home loan whose interest rate changes periodically — in contrast to the more traditional fixed-rate mortgage, whose interest rate remains constant throughout the loan’s lifetime. One of the most common types of ARMs is a hybrid ARM, which comes with a fixed, usually lower rate for three, five, seven or 10 years. After that fixed period, the rate can move higher or lower for the remainder of the mortgage term (ARMs are generally 30-year loans). The rate can’t rise indefinitely, however. There are caps on how much the rate can go up in each interval and also over the life of the loan.

ARMs’ variable interest rates typically change at predetermined times, such as every six months or one year, based on the movement of a market index.

Many mortgage lenders rely on the Secured Overnight Financing Rate (SOFR) to determine the adjustments for ARMs. The yield on the one-year Treasury bill and the 11th District cost of funds index (COFI) are other common benchmarks.

The benefit of an ARM is that it’s typically initially cheaper than a fixed-rate mortgage, keeping your monthly payments more affordable at the outset. The drawback, however, is that the rate can go up, sometimes substantially, after the initial rate period ends.

Here’s what you need to know about the requirements to qualify for an ARM.

ARM loan requirements

ARMs have very similar borrower requirements to fixed-rate mortgages, although qualifying for one can be more difficult if your income isn’t high enough to weather an upward rate adjustment.  As with any other mortgage, you’ll also need to furnish proof of employment and income as part of the application. These proofs  include pay stubs, tax returns, W-2s and paperwork about any other sources of income, such as child support.

ARM credit score qualifications

You’ll need a credit score of at least 620 to qualify for a conventional ARM. FHA ARMs have a lower threshold: 580. VA ARMs don’t have a blanket credit score requirement, but many VA lenders look for at least 620.

ARM debt-to-income (DTI) ratio qualifications

Generally, the DTI ratio for ARM mortgage loans can’t exceed 50 percent. Borrowers are qualified for ARMs based on ability to cover a higher monthly payment, not the initial lower payment, so if you have many other monthly obligations and a lower income, you might not qualify.

ARM down payment requirements

A conventional ARM requires at least 5 percent of the home’s purchase price for a down payment. An FHA ARM requires at least 3.5 percent. There’s no down-payment requirement for a VA ARM.

ARM loan limits

In 2023, you can get a conforming ARM for up to $726,200 (or as much as $1,089,300 if you live in a more expensive housing market). If you need a bigger mortgage than that, some lenders offer jumbo or nonconforming, loans with adjustable rates. These can be had in much higher amounts, such as $2 million or more, but they also require a higher credit score and down payment to qualify.

Should you get an ARM (adjustable-rate mortgage)?

An ARM can be a great idea considering the initial lower interest rates, but it’s not the best fit for all homeowners. For one, you need to be comfortable with the risk that your mortgage payments could go up after the initial fixed-rate period is over. Assuming you will need to pay off your loan in a longer time span, it’s important to calculate how much you could be saving to see if it’s worth it. For those taking out a jumbo loan, for example, the ARMs may be worth it, since even a faction of a percent of savings can add up to a significant amount.

Or, an ARM may make sense if you only plan on living in the home you’re buying for around five to 10 years. That way, if you sell the home before the fixed period ends, you don’t necessarily have to worry about rates going up for that particular mortgage.