Lower initial rate
Adjustable Rate Mortgage
Start with a lower fixed rate for an initial period, then adjust periodically based on market conditions.
An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an initial period - often 5, 7, or 10 years - typically lower than a comparable 30-year fixed rate. After that period ends, the rate adjusts periodically based on market conditions, within limits set by the loan.
Today’s ARMs are built with far more consumer protection than the ARMs of the mid-2000s. Rate caps limit how much your rate can increase at each adjustment and over the life of the loan, so there’s a known ceiling on your worst-case payment. Lenders are also required to qualify borrowers based on their ability to repay, including at higher potential rates - not just the low introductory rate - which helps prevent the kind of payment shock that caused problems in the past.
This can be a good fit if you plan to sell or refinance before the fixed period ends, or if you expect your income to grow and want a lower payment early on. We’ll walk you through how the adjustments and caps work and what your rate could look like over time, so there are no surprises.
Reading an ARM’s name
An ARM’s name tells you how it works. In a 7/6 ARM, the rate is fixed for the first 7 years, then adjusts every 6 months. A 5/6 and a 10/6 work the same way, with 5 or 10 fixed years.
How the new rate is set
When the fixed period ends, your rate equals an index, a published market rate, plus a fixed margin set when you take out the loan. Your margin never changes. Your rate moves only as the index moves, and only within the caps.
The three caps
- First adjustment cap: the most the rate can change at the first adjustment
- Periodic cap: the most it can change at each adjustment after that
- Lifetime cap: the most it can ever rise above your starting rate
These caps are spelled out in your loan documents before you commit, so you know your worst case up front.
Who an ARM is a good fit for
- Buyers who expect to move within the fixed period
- Buyers who expect their income to rise
- Jumbo borrowers, where ARM pricing is often more attractive
- Buyers who plan to refinance later
Common questions
Can my rate go down?
Yes. If the index falls, your rate can adjust down at the next adjustment, usually not below a set floor.
What if I’m still in the home when it adjusts?
You can keep the loan, or refinance into a fixed rate if that makes sense at the time.
Is an ARM risky?
It carries more uncertainty than a fixed rate. The caps limit that risk, and we’ll show you the payment at the worst case before you decide.
Wondering if an ARM fits your plans? Call us at 303-931-3239, or get prequalified online.