ADJUSTABLE RATE MORTGAGE
A dynamic loan option to power your goals.
What is an Adjustable Rate Mortgage Loan?
An Adjustable Rate Mortgage, or ARM, can be a powerful tool for homeowners. An ARM is a mortgage that offers a low introductory fixed rate term, typically for 5, 7, or 10 years. After this period is over, the adjustable period follows for the remainder of the 30 year term*. During this adjustment period the interest rates can adjust up or down, depending on the financial index it is attached to.
During the initial fixed period, the interest rates on an ARM are generally lower than with a 30 year fixed*. This means lower monthly payments for those first 5, 7, or 10 years. If you plan on selling or refinancing your home in 5-7 years, the ARM is a great option for lowering your rate and payments during that introductory fixed period.
Here is a breakdown of an adjustable rate mortgage:
1
Receive lower interest rates and payments early within the life of the loan.
2
Mortgage payments & interest rates remain fixed for introductory period
3
Caps on interest limit the amount a rate can rise annually and over the life of the loan.
What happens if you don’t refinance or move in the next 5- 7 years, and you reach the end of your ARM fixed term? When an ARM adjusts, the interest rates may be higher or lower than they are when you first get the loan. There is a risk of your interest rate and payments adjusting up. If your ARM does adjust up, a Cap will limit the amount that the loan can go up annually and over its lifetime. You will be able to anticipate a worst-case scenario and know exactly how far up your interest rate can change that year and beyond. Keep in mind that, while the initial fixed period of an ARM benefits the borrower, the adjustable period benefits the lender.
Big Benefits For Short Term Goals
Lenders are able to offer lower interest rates on an ARM because they only have to guarantee that rate for the introductory fixed period. Luckily, the average American refinances or moves every 5-7 years, which just happens to be the same fixed period on an ARM. For that period of time, you can benefit from lower interest rates and monthly payments compared to a 30-year fixed*.
SAVE MONEY
Put that money back in your wallet each month with lower mortgage rates and payment.
GET MORE
Possibly qualify for a higher loan amount and afford more home
EFFICIENT
Pay off your principal balance faster by making additional payments each month
We’re here to help.
The bottom line is that an ARM can be a powerful tool to get you the lowest possible interest rates and monthly payments for a set period of time. This option is not right for everyone, but if you plan on moving or refinancing in the next 5 to 7 years, an ARM could be an ideal loan for you. At American Pacific Mortgage, our loan experts can help you to determine if an ARM is the best fit for your financial goals.
Adjustable-Rate Mortgage FAQs
Q: What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically based on market conditions. It often starts with a lower fixed rate for the first few years before adjusting at set intervals.
Q: How does an adjustable-rate mortgage differ from a fixed-rate mortgage?
Unlike a fixed-rate mortgage, which has a consistent rate for the entire loan term, an ARM’s rate can increase or decrease after the initial fixed period. This can lower your initial monthly payments but introduces some uncertainty later.
Q: Who should consider an adjustable-rate mortgage?
An ARM can be a great option for buyers who plan to move or refinance within a few years. It offers lower initial payments, making it ideal for those who don’t expect to stay in their home long-term.
Q: How much can my rate go up on an ARM?
ARMs include caps that limit how much your rate can rise at each adjustment and over the life of the loan. Understanding these caps — the initial cap, periodic cap, and lifetime cap — is key to knowing your worst-case payment. A local lender can walk you through exactly how your specific ARM would adjust.
Q: Can I refinance out of an ARM later?
Yes. Many buyers choose an ARM for the lower initial payments and then refinance into a fixed-rate loan before the rate begins adjusting, or if rates drop. Whether that makes sense depends on your timeline and market conditions, which your lender can help you evaluate.