With nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Written By Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Dori Zinn Loans WriterWith nearly two decades in journalism, Dori Zinn has covered loans and other personal finance topics for the better part of her career. She loves helping people learn about money, whether that’s preparing for retirement, saving for college, crafting.
Loans Writer Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Published: Jan 11, 2024, 5:00am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
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Adjustable-rate mortgages, or ARMs, are an alternative choice to conventional mortgages. They’re advantageous in certain situations, but compared to their fixed-rate counterparts, their unique interest rate structure can be difficult for some borrowers to understand.
An adjustable-rate mortgage is a home loan with a variable interest rate. This means your ARM rate can change every few months or annually, depending on your terms. A fixed-rate mortgage, on the other hand, has one set interest rate that doesn’t change for the life of your loan.
The most common form of an ARM is a hybrid ARM, where you pay a fixed interest rate for a set amount of time—usually the first few years of your loan—and then the rate adjusts regularly thereafter. These adjustments are based on a market index—the Secured Overnight Financing Rate (SOFR) being the most common for adjustable-rate products—that your lender uses to set and follow rates. There are a few different indexes, and the benchmark index rate your lender chooses might be different from what another lender chooses.
ARM rates can go up or down based on those benchmarks, but they also come with caps that limit how much they can increase at every adjustment date and over the course of the loan. There are three types of caps to be aware of:
One of the most common types of ARMs is the 5/1 ARM. The first number, five, is how long the fixed interest term will last on your loan. This means you’ll pay the same interest rate for the first five years of your loan. Then, the rate adjusts every year after that, which is what the second number indicates.
There are also options like 5/6 or 7/6 ARMs. With these options, you’ll pay the same rate for the first five or seven years of the loan. Afterward, the rate adjusts every six months.
There are certain features that might entice you to choose an ARM over a fixed-rate mortgage.
If your ARM follows the more popular hybrid model, you’ll pay the same low fixed interest rate for the first several years of your loan. This can save you a lot of money if you plan to only stay in your home for a few years and want to take advantage of the lower rate while you live there.
ARMs generally have lower interest rates, at least initially, compared to fixed-rate mortgages. A lower interest rate means a lower payment. You can use those extra funds to pay off other debt, invest in your future or make larger payments on your mortgage principal to pay off the loan faster.
The interest rate on your ARM can only increase by so much. This means even if mortgage rates are on the rise and you’re set to get an increase, it won’t go up an exorbitant amount. Ask each lender to explain what kind of interest rate cap structure it uses for its ARMs as you shop around.
While ARMs can serve you well in specific situations, they come with some notable disadvantages as well.
An interest rate bump means your monthly payments will increase. If you don’t think you can comfortably afford the new monthly payment once the adjustment goes through, you may have to cut costs in other areas.
Not every lender offers adjustable-rate mortgages, and those that do may not have the exact terms you’re looking for.
Fixed-rate mortgages are pretty straightforward. Since the rate on a fixed-rate mortgage doesn’t change, you won’t have to worry about your monthly payments changing. This makes them easy to budget for.
That’s not the case with ARMs. Once the ARM’s fixed-rate period ends, changes happen periodically and what you pay one month could increase the next month. These regular adjustments can be harder to predict and budget for, so an ARM may not be a good option if, for example, you have an unpredictable income or struggle with budgeting in general.
You might be a good fit for an ARM if you:
You may want to skip an ARM if you:
Check your rates today with Better Mortgage.
