Adjustable-Rate Mortgage (ARM)

Benefits of Adjustable-Rate Mortgages

1. Lower Starting Interest Rates:Many borrowers secure the best adjustable-rate mortgage options with lower initial interest rates compared to fixed-rate loans. This reduces upfront costs and monthly payments in the early years.

2. Low Down Payment Requirements:ARMs often allow down payments as low as 5%, making it easier for buyers to enter the housing market.

3. Flexible Monthly Payments:During the adjustable phase, payments may decrease if market rates drop. This is especially useful in a falling-rate environment.

4. Short-Term Affordability: An adjustable rate mortgage 10 1 or 15 year adjustable rate mortgage is ideal for buyers planning to move or sell the home within 5 to 10 years. It allows them to maximize savings before the rate adjusts.

ARM Loan Eligibility Requirements

1. Minimum 5% Down Payment:Buyers can qualify for ARMs with a down payment as low as 5%, helping reduce upfront costs.

2. Credit Score of 620 or Higher:Most lenders require a minimum credit score of 620, though some may accept slightly lower depending on the full financial profile.

3. Flexible Credit Guidelines:The option adjustable rate mortgage offers more flexibility for borrowers with non-traditional credit histories or variable income sources.

4. Lower Monthly Commitments (Initially):Monthly payments during the fixed period are often lower than fixed-rate loans, helping buyers manage their budgets more comfortably.

How Adjustable-Rate Mortgages Work

An adjustable-rate mortgage begins with a fixed-rate term—often 5, 7, 10, or even 15 years—after which the rate adjusts annually. For example, a 10 year adjustable rate mortgage has a fixed rate for the first 10 years and adjusts each year after that. A 1 year adjustable rate mortgage adjusts annually after just one year.The rate changes are based on two key factors:

‍Index: Usually tied to financial benchmarks like SOFR (Secured Overnight Financing Rate).

Margin: Set by the lender and added to the index to calculate your new rate.

Rate caps are included to limit how much the rate (and payment) can increase at each adjustment and over the life of the loan.

Pros & Cons of ARMs:

Pros:

1. Lower starting rates and payments

2. Potential for falling rates during the adjustable period

3. Short-term savings for buyers planning to refinance or sell

4. Can be used with VA loans (see adjustable rate mortgage VA options)

Cons:

1. Payments can increase significantly when the rate adjusts

2. Requires careful long-term planning

3. May not be suitable for buyers with tight budgets or income uncertainty

Who Should Consider an ARM?

Short-Term Homeowners: Ideal for buyers planning to move or sell within 5 to 10 years.
Future Refinancers: Great for those who expect to refinance before the adjustment period begins.
VA Buyers Seeking Flexibility: Veterans may qualify for adjustable rate mortgage VA programs with favorable terms.

Who Should Consider a Fixed-Rate Mortgage Instead?

Long-Term Buyers: Those planning to stay in their home for 15+ years may benefit more from the consistency of a fixed rate.

Risk-Averse Borrowers: If you prefer steady monthly payments with no surprises, a fixed-rate mortgage may be better suited for your needs.

Simplicity Seekers: Fixed rates offer straightforward budgeting with no future rate changes to worry about.

Next Step: Compare Adjustable-Rate Options

Whether you're considering a 10 year adjustable rate mortgage, a 1 year adjustable rate mortgage, or a 15 year adjustable rate mortgage, understanding your goals is key to choosing the right product. Our team can help you explore today’s market and identify the best adjustable rate mortgage that fits your budget and future plans.