With mortgages rising dramatically across the board last year, ARM rates may be worth a look, according to Jacob Channel, senior economist for LendingTree. “Introductory rates on adjustable-rate mortgages are dozens of basis points lower than fixed-rate mortgages with similar terms,” Channel adds.
“That makes them very appealing to borrowers, especially with mortgage rates at the highest levels in more than a decade,” says Channel. “However, borrowers should consider the risks since the rates could rise with time, leaving homeowners with a higher monthly mortgage payment than they can afford,” he says.
| Lender name | ARM types offered | Where it lends |
|---|---|---|
| Fairway Independent Mortgage | 5-, 7- and 10-year ARMs | All 50 states & D.C. |
| Guaranteed Rate Mortgage | 5-, 7- and 10-year ARMs | All 50 states & D.C. |
| Rocket Mortgage | 7- and 10-year ARMs | All 50 states & D.C. |
| Wells Fargo | 5-, 7- and 10-year ARMs | All 50 states & D.C. |
| AmeriSave | 5-, 7- and 10-year ARMs | 49 states & D.C. (New York excluded) |
In order to appear on our list, lenders needed to be licensed to lend in nearly all states, offer multiple ARM loan products and earn a star rating of 3 or higher on LendingTree’s mortgage rating system.
An ARM loan, or adjustable-rate mortgage loan, is a mortgage with an interest rate that changes. They typically feature a lower interest rate than 30-year fixed-rate mortgages for a set time period, lasting between one month and 10 years. Most adjustable-rate loans are considered “hybrid mortgages,” which simply means they’re a combination of both a temporary fixed-rate mortgage and an adjustable-rate mortgage.
An ARM loan has several components you need to understand to help you decide whether it’s the best mortgage type for you.
→ Initial adjustment cap. This reflects the maximum your rate can rise after the initial fixed-rate period ends.
→ Subsequent adjustment cap. This cap limits how much your mortgage rate can increase in each adjustment period after the first one.
→ Lifetime cap. This cap restricts how high your rate can increase over the life of the loan.
ARM caps are disclosed with three numbers. For example, a 5/1 ARM with 5/2/5 caps means the following:
Federal law requires lenders to provide the Consumer Handbook on Adjustable-Rate Mortgages (CHARM) disclosure booklet and a loan estimate that details how much your rate and payment can change over time. However, the booklet is 20 pages long and may be hard to get through if you’re not familiar with mortgage terminology.
To simplify things, here’s an example of how a 5/1 ARM with 5/2/5 caps could adjust if you’re borrowing $300,000 with an initial 5.5% rate.
| Interest rate for first five years | 5.5% |
| Principal and interest (P&I) payment for first five years | $1,703.37 |
| Interest rate maximum after five years | 10.5% |
| Maximum P&I payment after five years | $2,744.22 |
| Maximum rate over life of loan | 10.5% |
| Maximum P&I payment over life of loan | $2,744.22 |
| Pros | Cons |
|---|---|
The rate is usually lower at first compared to 30-year fixed rates | The rate could rise after the initial teaser-rate period ends |
The monthly payment is lower for a set time | The monthly payment could become unaffordable when it adjusts |
The monthly savings can be used to stockpile cash for a new home down payment | The qualifying standards may be more stringent |
There are two common types of ARMs: hybrid ARMs and interest-only ARMs.
Hybrid ARMs. As explained above, hybrid ARMs combine an initial fixed-rate loan with an adjustable-rate mortgage after the teaser-rate period ends.
Interest-only ARMs. An interest-only ARM allows qualified borrowers to pay only the interest due on the loan for a set time, usually between three and 10 years. During that time the loan balance isn’t paid down at all.
There is another type of ARM that is rarely offered, called a payment-option ARM. It allows borrowers to choose different “options” for how they pay their loan. The three choices typically include a principal and interest payment, an interest-only payment and a minimum or “limited” payment.
With the limited payment option, borrowers can opt to pay less than the interest accruing on their mortgage, and add the unpaid interest to the loan balance. They were popular in the years leading up to the 2008 housing crash, and most lenders steer away from them.
Adjustable-rate mortgage options are available for conventional loans, loans backed by the Federal Housing Administration (FHA) and loans guaranteed by the U.S. Department of Veterans Affairs (VA).
A few things worth noting about ARMs with each type of loan program:
An ARM loan makes sense if you need to save money over a short period of time. You should choose an adjustable-rate mortgage if:
It’s best to opt out of an ARM if:
Because of the risk of your monthly payment becoming unaffordable due to ARM loan rate increases, lenders set more stringent qualifying guidelines for ARMs than for fixed-rate mortgages. In general, you’ll need:
Yes, as long as you meet the minimum fixed-rate mortgage requirements.
The rate and monthly payment could become unaffordable, making it difficult to manage your monthly payments. If you are unable to make payments, you could go into mortgage default and the lender could foreclose on your home.
Your rate can only go as high as the lifetime cap spelled out in your loan terms. Be sure you review the amortization schedule that comes with your ARM plan so you know the worst case scenario.