Adjustable-Rate Mortgage (ARM)
Lower initial rate that adjusts after a fixed period, ideal for shorter-term ownership.
Overview
An adjustable-rate mortgage (ARM) starts with a fixed rate for an initial period (typically 5, 7, or 10 years), then adjusts annually based on a market index plus a margin. The initial rate is typically 0.5-1.5% lower than a comparable fixed-rate mortgage, saving borrowers significant money during the fixed period. ARMs are ideal for buyers who plan to sell or refinance before the adjustment period begins. Rate caps limit how much the rate can change at each adjustment and over the life of the loan.
Min. Down
3-5%
Min. Credit
620
Term
30 (5/1, 7/1, or 10/1 ARM) yr
PMI
Yes*
Best For
- Buyers planning to move within 5-10 years
- Buyers expecting future income growth
- Those who will refinance before adjustment
- Military families who relocate frequently
Pros
- Lower initial interest rate (0.5-1.5% less)
- Significant savings during fixed period
- Rate caps protect against extreme increases
- Available in conforming and jumbo amounts
- Good for short-term homeownership
Cons
- Rate uncertainty after initial period
- Monthly payment could increase substantially
- Complex terms to understand
- Psychological stress of rate adjustments
- May not save money if you stay long-term
Requirements
- Minimum 620 credit score
- Standard DTI requirements (43-50%)
- Documentation of income and assets
- Property appraisal
- Full understanding of adjustment terms
Frequently Asked Questions
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