Current Adjustable Rate Mortgage Rates

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.