Review current adjustable rate mortgage rates for January 23, 2020. The table below enables you to compare adjustable rate mortgage rates for leading lenders near you. The table shows five, seven and ten year ARM mortgage rates and closing costs. These are also called 5/1, 7/1 and 10/1 ARMs because your mortgage rate and monthly payment are fixed for the first five, seven and ten years and then subject to adjust annually for the remainder of the loan. The starting rate and monthly payment for an ARM are usually lower than the for a fixed rate loan but the rate and payment for an ARM can potentially increase so there is more risk for borrowers.
Use the table below to compare the mortgage rate, APR, closing fees and monthly payment for different ARM programs and lenders. You can refine your search to review updated ARM mortgage rates based on your specific inputs for loan amount and other factors. You can also adjust the Loan Type and Term selection to compare adjustable rate and fixed rate mortgages side-by-side. We recommend that you contact at least five lenders to find the best loan terms and determine if an ARM is the right home loan financing option for you.
There are multiple factors that determine ARM mortgage rate pricing including the fixed rate period, fully-indexed rate and lender terms. We review these factors below so you can find the adjustable rate mortgage with the lowest rate and most borrower-friendly loan terms.
The Length of the Fixed Rate Period. The length of the fixed rate period is the most significant factor that determines ARM mortgage rates with the shorter the period, the lower the rate. For example, a 3/1 ARM should have a lower initial interest rate than a 10/1 ARM, although loan terms ultimately depend on lender pricing and other inputs. The shorter the fixed rate period, the less risk for lenders and the more risk for borrowers because your rate and payment can increase sooner over the course of your loan. To compensate for this added risk, you pay a lower initial interest rate.
The ARM Margin and Index. The ARM margin and index determine your mortgage rate during the adjustable rate phase of an ARM. The margin is a fixed interest rate while the index is subject to change based on fluctuations in the economy. The index is usually based on an underlying benchmark such as the ten year treasury yield or the prime rate. The ARM margin plus the index is called the fully-indexed rate, which is the rate used to calculate your monthly payment after the fixed rate period of the loan. The higher the margin and the index, the higher your rate and monthly payment. While you know the ARM margin at the time you get your loan, you do not know what the index will be until your loan adjusts. This is why ARMs are riskier than fixed rate loans -- because you do not know what your future rate and payment will be.
Adjustment Interval. The adjustment interval determines how frequently your loan adjusts during the adjustable rate period. Most ARMs adjust on an annual or semi-annual basis although some adjust monthly. For example, a 7/1 ARM adjusts on an annual basis beginning in year 8 of the mortgage. The longer the adjustment interval, the more favorable the loan terms for the borrower because the loan adjusts less frequently.
Loan Caps. ARM caps limit how much your mortgage rate can increase. ARMs usually have adjustment caps that limit how much your rate can increase at each adjustment interval as well as life caps that limit how much your rate can increase over the entire loan. For example, a typical adjustment cap is 2% while a standard life cap is 5%. This means that if your initial mortgage rate is 3%, the higher rate you could pay on your loan is 8%. The lower the loan caps, the better for borrowers. Loan caps are relatively standard but you may be able to negotiate better terms, depending on the lender.
Lender Program and Terms. Lenders offer different types of ARM programs and some lenders offer much more aggressive terms than others. For example, some lenders offer 5/5 ARMs where your mortgage rate and payment are fixed for the first five years, adjusts at the end of year five and then is fixed for another five years before becoming an annual ARM. Additionally, some lenders may offer more competitive loan terms for longer ARMs than other lenders do for shorter ARMs. This means that a lender offers a lower initial mortgage rate for a 7/1 ARM than another lender offers for a 5/1 ARM. The longer ARM with a lower rate is the better financing option for borrowers. It is important to contact multiple ARM lenders to find the loan program and terms that best meet your needs.
Adjustable rate mortgage rates are typically lower than the interest rate on a 30 year fixed rate mortgage, at least initially. Borrowers benefit from the lower ARM mortgage rate, sometimes called a “teaser” rate, for the first 3, 5, 7 or 10 years of the loan, depending on what type of ARM you select. After this initial period, which is also called the fixed rate period, the interest rate is subject to change and possibly increase.
Lower adjustable rate mortgage rates mean a lower monthly payment for borrowers. A lower monthly mortgage payment provides additional financial flexibility for borrowers and makes owning a home more affordable, at least during the initial fixed rate period of the loan. The flip side of an adjustable rate mortgage is that your monthly payment can potentially increase in the future if interest rates go up. Borrowers need to make sure that they can afford their monthly payment both at the beginning of the mortgage, when the interest rate is lower, and over time if their payment goes up.
The initial teaser ARM mortgage rate and monthly payment enable borrowers to afford a larger mortgage amount and potentially buy more home. Being able to qualify for a larger mortgage amount is one of the main attractions of an adjustable rate mortgage. The downside of being able to afford a larger loan amount with an adjustable rate mortgage is that you lose the certainty that comes with a fixed rate mortgage, where the interest rate remains the same over the life of the mortgage.
The interest rate for an adjustable rate mortgage is subject to change after a fixed period of time, usually the first 3, 5, 7 or 10 years of the mortgage. The period of the loan when the interest rate can change is called the adjustable rate period and lasts until the end of the loan term, which is usually 30 years. If you think interest rates will decline in the future then an adjustable rate mortgage may be a good option. Because if interest rates go down during the adjustable rate period of your loan, your monthly payment will decrease which is great for borrowers. Please note that predicting interest rates is highly challenging so this approach can expose you to significant risk.
An ARM is a good option if you are confident you are going to sell your home before the loan enters its adjustable rate phase. Borrowers who know they are only going to own their home for a set period of time are able to take advantage of the lower initial ARM interest rate, without being exposed to the risk that their rate and monthly payment increase in the future. For example, if you know you are going to own your home for less than five years then a 5/1 ARM may make sense, or possibly a 7/1 ARM if you want to be on the safe side. In this scenario, as long as you sell your home within five years you benefit from having a lower monthly payment relative to a fixed rate loan but you eliminate the risk of future payment shock because you payoff the mortgage before the ARM can adjust.
Borrowers who select an adjustable rate mortgage should have a higher appetite for risk. Even if you have every intention to sell your home and payoff your loan long before an ARM adjusts and your monthly payment potentially increases, things do not always go as planned. Your personal circumstances may change or you may not be able to sell your home. Before you select an adjustable rate mortgage you should fully understand how the loan works including your maximum potential interest rate and monthly payment. Borrower who prefer certainty and peach of mind should probably avoid ARMs while borrowers with a higher risk tolerance may find them to be a more appealing mortgage option.
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