Homeowners with some tolerance for uncertainty might find that an adjustable-rate mortgage is worth considering as a way to get a low introductory rate before the adjustments kick in. This loan type can be a particularly good choice if you’re aiming to rent out for flip the property, or when you know you intend to move before the loan’s fixed-rate period ends.
Keep reading and we’ll explain how ARMs work, consider when an ARM is worth considering as an alternative to a fixed-rate mortgage, and consider average ARM rates according to Mortgage Research Center data.
You can see the previous business day’s ARM rates report here.
ARMs come in a variety of configurations in terms of how long the initial fixed period is and how frequently adjustment periods occur. For example, a 7/6 ARM is one with a fixed rate for seven years, then adjustment periods every six months.
Fortune reviewed the most recent MRC data available as of Oct. 14.
Fixed-rate mortgages dominate U.S. households, comprising about 92% of all home loans. Unlike adjustable-rate mortgages (ARMs), which allow interest rates to change after an initial period, fixed-rate loans offer consistency throughout their term—which likely explains their popularity.
That said, ARMs can be advantageous under specific circumstances. Around 8% of borrowers choose them for their unique benefits.
Three groups of homebuyers can commonly benefit from considering ARMs:
Saving up for a down payment? Make sure you have a high-yield savings account.
ARMs begin with an introductory fixed rate that often lasts three, five, seven, or 10 years before the loan transitions into its adjustment periods. How much your rate changes during an adjustment period can depend on a variety of factors, including:
Common ARM formats include 5/1 (an introductory rate that lasts for five years followed by annual adjustments) and 10/6 (a 10-year intro period followed by adjustments every six months) structures. Other structures on the market include 3/1 ARMs, 7/1 ARMs and 10/1 ARMs.
Learn more: Why the Secured Overnight Financing Rate might matter for your mortgage.
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Life happens. Plans change. If it turns out you’re going to be in your starter home longer than expected, and you initially took out an ARM, you might opt to refinance to a fixed-rate loan.
First, know you’re not alone. A large chunk of Millennial and Gen Z homeowners can’t afford to upgrade and are continuing on in their starter homes
To refinance from an ARM to a fixed-rate mortgage, the process is more or less the same as refinancing from one fixed-rate loan to another. You’ll shop around with various lenders, provide the application documents necessary to show your credit profile and income meet the lender’s requirements, and you’ll use the new loan to pay your old one off in full.
Work with a trusted loan officer to ensure you’re selecting the best mortgage type for your needs. To get you started, here are some basic factors to consider in evaluating if an ARM is right for you.
Glen is a commerce editor on the Fortune personal finance team covering housing, mortgages, and credit. He’s been immersed in the world of personal finance since 2019, holding editor and writer roles at USA TODAY Blueprint, Forbes Advisor, and LendingTree before he joined Fortune. Glen loves getting a chance to dig into complicated topics and break them down into manageable pieces of information that folks can easily digest and use in their daily lives.
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