For those of us who lived through the housing crisis of 2008, you may associate adjustable rate mortgages (ARMs) with predatory lending practices and mass foreclosures. But today’s ARMs have been a common mortgage product for years, and they’re much more regulated now than they were back then.
While you should understand the risks of any mortgage loan before you sign, an ARM could be the right choice for you depending on your goals and a few specific circumstances. Here’s what to know about how they work, how they compare to traditional mortgages and when it might be a strategic way to navigate a complicated housing market.
⭐ Must read: Is right now a good time to buy a house? What to know about the current market
How does an adjustable-rate mortgage (ARM) work?
An adjustable-rate mortgage is a little more sophisticated than its fixed-rate sibling. Instead of having one interest rate for the life of the loan, your ARM’s interest rate adjusts once or twice a year based on the Secured Overnight Financing Rate (SOFR) set by the U.S. Treasury plus a margin determined by your lender.
That might sound scary, especially if you’ve watched rates climb steadily in the years since the 2020 pandemic, but ARMs come with built-in rate caps to protect you from wild rate fluctuations.
ARM loans are expressed as two numbers separated by a slash — such as 7/1 or 2/1/5 — which represent the terms of the loan or the interest rate caps for the loan.
If you see two numbers on an advertised ARM, that typically indicates the terms of the loan.
|
🏡 Anatomy of a 7/1 ARM |
|
|
First number: 7️⃣ |
Second number: 1️⃣ |
|
The first number will be a 3, 5, 7 or 10, indicating how long your lower introductory rate lasts before your first adjustment period. In this example, your introductory rate lasts seven years. |
The second number indicates how often your rate adjusts after the introductory period. This will either be a 1 — indicating the rate adjusts once a year — or a 6, indicating the rate adjusts every six months. |
If you see three numbers — as in this example for a 2/1/5 ARM — you may be looking at the interest rate caps.
|
🏡 Anatomy of a 2/1/5 ARM |
||
|
First number: 2️⃣ |
Second number: 1️⃣ |
Third number: 5️⃣ |
|
Indicates your initial cap — or how much your rate can increase in your first adjustment period. In this example, your initial adjustment can only increase by 2%. So, if you have a 5.78% interest rate, it can only go up to 7.78%, regardless of what the interest rate is at the time of adjustment. |
Indicates your periodic cap — or the maximum your interest rate can increase with each subsequent rate adjustment. Using our example, this number would indicate that your rate can only adjust by 1% per year. |
Indicates your lifetime cap — or how much your rate can increase over the life of the loan. So, using the previous examples, if you start with a 5.78% introductory rate, the interest rate of your ARM will never exceed 10.78%. |
ARM loans can be a popular choice, because the interest rates on an ARM are often slightly lower than those for a fixed-rate loan. For example, today’s average rate for a 10/1 ARM is 6.42%, according to Bankrate — or nearly 30 basis points lower than the rate for a traditional 30-year fixed mortgage.
This makes ARMs a strategic option for homebuyers who know they’ll be selling the property before the fixed, introductory rate adjusts or for those who know their income will be increasing before the first rate adjustment. But even in those circumstances, it’s a good idea to make sure you can afford the payment — even at the loan’s highest capped rate.
🔍 Learn more: How the Federal Reserve affects mortgage rates (Hint: It may not be how you think)
|
🔍 At a glance: Adjustable-rate mortgage vs. conventional mortgage |
||
|
Adjustable-rate mortgage |
Fixed-rate mortgage |
|
|
Interest rate |
Typically lower, especially if you choose a 3- or 5-year fixed term. |
Remains the same for the life of the loan |
|
Monthly mortgage payments |
Change every 6-months to a year after your initial fixed rate period |
Fixed for the life of the loan |
|
Minimum down payment |
5% — depending on the lender and your credit score |
3% — depending on the lender and your credit score |
|
PMI required? |
Maybe. Some credit unions offer ARMs with no PMI on down payments of 10% or less |
Yes, for down payments under 20% |
|
Closing costs |
2% to 5% |
2% to 5% |
|
Refinancing available |
Yes |
Yes |
|
Government-backed ARM loan options |
Yes |
Yes |
Benefits of an adjustable-rate mortgage (ARM)
As complex as an ARM loan can be, they come with four key advantages:
-
Lower monthly payments in the first years of your mortgage. A lower initial interest rate means lower payments than a traditional mortgage, which could allow room in your budget to pay for renovations or upgrades to your home or build valuable equity faster.
-
Interest rates could lower with the market rate. If mortgage rates continue to drop, you can take advantage without having to pay closing costs on a refinance.
-
Rate caps, even if interest rates spike. No matter how much interest rates spike, you’ll never pay more than the lifetime rate.
-
Lower down payment without PMI. This isn’t true for all ARM loans, but while most lenders require private mortgage insurance (PMI) for any down payment less than 20%, some federal credit unions offer ARMs with a 5% or 10% down payment with no PMI requirement.
🔍 Learn more: 6 ways to get the lowest rate on your next mortgage
Drawbacks of an adjustable rate mortgage (ARM)
As with any loan, you’ll want to weigh four potential cons of adjustable-rate mortgages compared to a traditional mortgage before you apply:
-
It can be harder to qualify. While the requirements for an ARM may appear to be the same as a fixed-rate loan, the variable nature of the interest rate could mean you’ll have to prove you can make the payments at the highest interest rate.
-
Loan terms are more complicated. There are a lot of moving parts in an ARM that can be confusing, even to people who are familiar with lending. And you may not want to take on those complexities with a giant financial decision like a mortgage.
-
Payments could go up. Not much in life is predictable, regardless of how well you’ve planned. And with the fluctuations we’ve all seen in the economy, taking out an ARM loan means you’ll need to be prepared for your mortgage payments to go up if rates increase.
-
Higher long-term costs. If your interest rates go up and stay up, you could end up paying more for the loan in the long term than you would have paid for a fixed-rate loan, even with a slightly higher rate.
🔍 Learn more: Do you qualify for homebuyer assistance? You might — even if you’ve already owned a home
Can you refinance an ARM?
Refinancing an ARM is the same process as refinancing any mortgage. Whether your expected promotion or your plans to move go awry, if interest rates go up, you can choose to refinance to a fixed-rate mortgage before the end of your introductory rate period.
Before you start the process, check your loan contract for a prepayment penalty. Most penalties expire after the first three years, but if you have a 3/1 ARM, you may end up with higher upfront closing costs on your refinance if a 1% to 2% prepayment penalty is included. And be sure to shop around and find a lender who’s ready to provide the best loan for you.
🔍 Learn more: How to refinance your ARM into a fixed-rate mortgage
How to know if an ARM is right for you
A mortgage with an adjustable-rate might not be right for everyone, but it could be the perfect fit for you, especially if:
-
You’re going to move before the introductory rate expires. If you’re only going to live in an area for a set amount of time, but would rather invest in a home than pay rent, an ARM could be a good way to get a lower interest rate.
-
You’re expecting an increase in your income. Whether you’re just starting out on a career path or have a job with a set promotion schedule, an ARM could help you save money in the early days of your homeownership.
-
You want to take advantage of a lower home price. If you’ve found an amazing home at a great price now, you may not want to wait for rates to come down before you buy – especially if home values are on the rise. An ARM can give you the best rate possible to get into your home before you’re priced out.
-
You’re ready to refinance before rates go up. If you’re OK with paying extra closing costs on a refinance, it can be a smart financial choice to pay the lower ARM interest rate for the first years of your mortgage and refinance before your rates adjust too far up.
When to avoid an adjustable-rate mortgage
Despite the regulatory changes made, taking on an ARM is still a risk. You might want to avoid signing up for an adjustable rate if:
-
You’re a risk-averse borrower. If you’re the kind of person who might obsess over interest rates the closer you get to the end of your introductory period, you may not want to add the stress of an ARM to your life.
-
You have poor credit. If you can’t qualify for the lower rate an ARM provides, it’s probably not worth the risks that come with it.
-
Your income or employment isn’t reliable. If you’re in an industry with a lot of layoffs or turnover, the possible mortgage payment increases that come with an ARM might add to your financial stress in the end.
-
You don’t want to pay more closing costs to refinance. While interest rates could decrease with an ARM, you can’t count on that. And, if you end up needing to refinance, you’ll be adding those closing costs to the overall cost of your loan.
🔍 Learn more: 9 surprising factors that can damage your credit score (and how to fix them)
Alternatives to an ARM
If you decide against an ARM, there are still plenty of mortgage options for buying a home — including conventional loans, FHA loans, VA loans and nonconforming jumbo loans.
|
At a glance: Popular mortgage loan types |
|||
|
Type of mortgage |
Key features |
Requirements |
Best for |
|
Conventional loan |
• Down payments from 3% |
• FICO score of 620 or higher |
Borrowers with good credit and stable income |
|
FHA loan |
• Down payments from 3.5% |
• Credit score of 500+ with 10% down |
First-time homebuyers or those with credit challenges |
|
VA loan |
• No down payment |
• Military service eligibility |
Veterans, active service members and eligible spouses |
|
Nonconforming jumbo loans |
• For loans over $800,000 |
• Credit score of 700+ |
High-value homebuyers with strong finances |
🔍 Learn more: 4 popular mortgage loans for homebuyers: Conventional, FHA, VA and jumbo loans
Other stories in our mortgages and home loans series
-
Mortgage rates are dropping: How much does a 1% rate change matter to your loan?
-
5 ways to build equity in your home more quickly (and why it matters)
-
Can you qualify for a mortgage if you’re about to retire?
-
Fact vs. fiction: Top 7 home equity myths — debunked
-
Should you pay off your mortgage early? 5 top factors to consider first
FAQ: Mortgages, buying a home and protecting your asset
Learn more about buying and protecting your property with these commonly asked questions. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.
What is private mortgage insurance?
PMI is insurance that protects your mortgage lender from loss if you default on your loan or aren’t able to repay what you borrow. You’ll typically pay PMI on conventional mortgages when your down payment is less than 20% of your home purchase price. If you put down less, you’ll pay PMI until you’ve built at least 20% equity in your home, after which you can request your lender to remove your PMI responsibility. See our guide to building equity in your home more quickly — and avoiding PMI.
What is the 28/36 mortgage rule?
The 28/36 rule is a general guideline used to calculate how large of a mortgage you can afford against your income. The rule suggests that your mortgage costs shouldn’t be more than 28% of your gross monthly income or more than 36% of your combined debt, including your new monthly mortgage costs. Many lenders use the 28/36 rule to determine your financial stability before extending a loan offer. Learn more in our guide to shopping for a mortgage.
Can a lender ask my age as part of the application process?
Yes, but a lender or broker can’t legally deny your application based on your age. Your date of birth is often included on an application as part of the usual personal and information a lender or creditor gathers, and while your age can be a consideration among other factors — such as your income and credit score — it can’t be considered alone to decline you a loan or credit. The only age requirement is that you must be at least 18 years old. Learn more in our guide to mortgage approval in retirement.
Is it worth it to buy a home warranty?
While some homeowners get value from their home warranties, others complain about denied claims, fighting for payments, long wait times and shoddy service. Whether you have a good or bad experience can come down to the type of repair needed, the contract’s fine print — and, sometimes, just plain luck. Learn more about what these contracts cover, whether they’re worth the cost and alternatives to consider in our comprehensive guide to home warranties.
Sources
-
Current ARM mortgage rates, Bankrate. Accessed July 2, 2025.
About the writer
Heather Petty is a finance writer who specializes in consumer and business banking, personal and home lending, debt management and saving money. After falling victim to a disreputable mortgage broker when buying her first home, Heather set on a mission to help people avoid similar experiences when managing their own finances. Her expertise and analysis has been featured on MSN, Nasdaq, Credit.com and Finder, among other financial publications. When she’s not breaking down the complexities of finance, she’s a young adult mystery writer of an internationally acclaimed series — and counting.
Article edited and updated by Kelly Suzan Waggoner
📩 Have thoughts or comments about this story — or ideas on topics you’d like us to cover? Reach out to our team at finance.editors@aol.com.
