At Bankrate, I’m focused on all of the factors that affect mortgage rates and home equity. I enjoy distilling data and expert advice into takeaways borrowers can use. Prior to Bankrate, I wrote and edited for Rocket Mortgage/Quicken Loans.

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If you chose a 3/1 ARM with 6.63% rate, you’d pay roughly $1,153 per month in mortgage interest and principal. A 30-year fixed-rate mortgage at 5.34% would cost you roughly $1,004 per month. Lenders offer homebuyers who want 3/1 ARMs an initial interest rate for three years.

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Adjustable-rate mortgages, or ARMs, have been largely ignored for years. Borrowers who buy or move in the near future could enjoy an ARM’s low rates and lower monthly payments. If you have a fixed-rate mortgage, such as a 30-year fixed-rate home loan, your interest rate and mortgage payment will always remain the same. But if you have a hybrid mortgage loan like a 3/1 ARM, your mortgage payments could drastically change every year once the three-year introductory period is over. An adjustable-rate mortgage makes sense if you have time-sensitive goals that include selling your home or refinancing your mortgage before the initial rate period ends.

1 vs 7/1 ARM rates

If you still have the ARM loan when the adjustment period begins, your rate could increase. A 5/1 ARM, for example, comes with a five-year initial period during which the rate is fixed. A 3/1 ARM means you have a fixed interest rate for three years, and your interest rate adjusts each year after that. Generally speaking, a shorter fixed-rate period will get you a lower starting interest rate. A 3/6 ARM, for instance, will usually have a lower initial interest rate than a 7/1 ARM, and a 7/1 ARM will have a lower rate than a 10/1 ARM.

Adjustable-Rate Mortgage: What an ARM Is and How It Works

With a 3-year adjustable-rate mortgage, you could get in over your head if your rate adjusts too high. Hybrid mortgages, like a 3/1 ARM, provide a variety of benefits, but come also with downsides. The advantage is that borrowers initially have access to mortgage rates that are usually lower than the ones available to people interested in 15-year or 30-year fixed-rate mortgages. However, 3/1 ARMs can be considered risky home loans because homeowners don’t know exactly how their interest rate will change after the initial fixed-rate period ends. When you get a mortgage, you can choose a fixed interest rate or one that changes.

Compare ARM rates

The lowest 3/1 ARM mortgage rates are typically reserved for the folks with the best financial track records. In other words, these folks have income stability, plenty of cash savings and high credit scores. That means that for 27 years, these homeowners have to deal with fluctuating interest rates that could make their mortgage payments expensive if rates climb. When the initial fixed-rate period ends, the adjustable-rate repayment period begins.

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• If you have a fixed-rate mortgage, such as a 30-year fixed-rate home loan, your interest rate and mortgage payment will always remain the same.
• A 7-year Adjustable Rate Mortgage (ARM) is a home loan with an interest rate that stays the same for the first seven years, followed by adjustments every six months.
• Once these teaser rates expire, the ARM will reset and be subject to interest rate adjustments for the remaining 25 or 27 years of the 30-year mortgage.
• These are ARMs that allow you to convert your balance to a fixed rate, usually for a fee.

The interest on your loan will be whatever the index rate is, plus a margin the lender adds. To make sure you can repay the loan, some ARM programs require that you qualify at the maximum possible interest rate based on the terms of your ARM loan. An ARM payment increase could stretch your budget thin, especially if your income has dropped or you’ve taken on other debt.

What RateChecker Can Provide

Generally, the longer the I-O period, the higher the monthly payments will be after the I-O period ends. These loans are generally priced more attractively initially, because there is more potential profit for the lender. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.

• Talk to a mortgage lender about your home buying plans and find out if a low-rate ARM is the right decision for you.
• Instead of refinancing from an adjustable-rate mortgage to a fixed-rate, they’ll refinance to an ARM, such as a 3/1 ARM.
• If you chose a 3/1 ARM with 6.63% rate, you’d pay roughly $1,153 per month in mortgage interest and principal.
• This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires.
• Borrowers who plan to move, upgrade, or downsize within 5 to 10 years often benefit from ARMs.
• While our priority is editorial integrity, these pages may contain references to products from our partners.

Current 3-Year Hybrid ARM Rates

So after the 5-year fixed-rate period, your rate can adjust once per year for the next 25 years, or until you refinance or sell the home. Almost all ARM loans today are “hybrid ARMs.” These have an initial period of 3-10 years where the interest rate is fixed. In fact, these initial introductory rates — sometimes called “teaser rates” — are often lower than those of a fixed-rate loan. With a 3/1 ARM, your mortgage rate is fixed for three years and then adjusts once a year for the rest of the loan term. At the beginning of your mortgage, ARMs work just like fixed-rate loans.

APR and ARM calculations

Kim Porter is an expert on credit, mortgages, student loans, and debt management. Yes, if your ARM loan comes with a “conversion option.” Lenders may offer this choice with conditions and potentially 3 year fixed rate mortgage an extra cost, allowing you to convert your ARM loan to a fixed-rate loan. An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

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The following table compares ARM rates to rates on other types of loans. The main risk with an ARM is that the rate will increase along with your monthly payments. The lender repeats the steps to adjust the interest rate and calculate the monthly payment every six months. A payment-option ARM, however, could result in negative amortization, meaning the balance of your loan increases because you aren’t paying enough to cover interest. If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments. The easiest way to shop for an ARM loan is to choose one with a start rate period that comes close to the time in which you expect to own the home or have the loan.

1 Adjustable-Rate Mortgage Quotes

If you’re buying your forever home, think carefully about whether an ARM is right for you. But at the conclusion of the initial fixed-rate period, ARM rates begin to adjust until the loan is refinanced or paid in full. These rate adjustments follow a set schedule, with most ARM rates adjusting once per year.

Just three years later in 2019, rates rose over a full percentage point to 4.18%. Then, go over your budget and figure out if you can afford to pay the mortgage at its peak rate. If you can’t afford that payment, then an ARM may not be a good choice for you.

Conforming loans

• But your monthly payments will go up once principal payments and rate adjustments kick in.
• Let’s say you’re looking to buy a home worth $200,000 with a 20% down payment.
• Some states let homeowners claim a double deduction, meaning that they can claim the mortgage interest deduction when they file both their state and federal income tax returns.
• Interest-only loans can give you even lower starting monthly payments than typical ARMs.
• The “limited” payment allowed you to pay less than the interest due each month — which meant the unpaid interest was added to the loan balance.
• A 5/1 ARM, for example, comes with a five-year initial period during which the rate is fixed.
• That’s about $96 more a month, and when compared with your monthly payment for a 30-year fixed-rate mortgage, it’s $2,940 more a year.
• With an interest-only loan you are paying only the interest for the initial 3 year period.

However, it cannot increase by more than 5% above the start rate over the life of the loan. Lifetimes caps can be expressed as a specific interest rate — for instance, 7.5 percent. They may also be defined as a percentage point over the start rate — for instance, five percentage points over your start rate. The ARM’s lower start rate is your reward for taking some of the risk normally borne by the lender — the chance that mortgage interest rates may rise a few years down the road. Similarly, the rates of a 10/1 ARM are fixed for the first 10 years and will adjust annually for the remaining life of the loan. Whereas a 5/6 ARM has a fixed interest rate for the first five years but will adjust every six months.

Some indexes lenders use to price ARMs include the yield on 1-year Treasury bills, the 11th District Cost of Funds Index (COFI) and the Secured Overnight Financing Rate (SOFR). If, for example, Treasury bill yields go up, your lender will increase your ARM rate. The following table shows current 30-year mortgage rates available in New York. You can use the menus to select other loan durations, alter the loan amount, or change your location. The monthly payment on the ARM, however, will change after three years, either increasing or decreasing based on the new variable rate in the first adjustment. A 3/1 ARM, or adjustable-rate mortgage, is a 30-year, fully-amortizing mortgage with a low, fixed introductory rate for the first three years.

Pros and cons of ARM rates

The choices included a principal and interest payment, an interest-only payment or a minimum or “limited” payment. You may prefer the 3-year ARM if you want to take advantage of lower initial interest rates and save money at the start of your loan term. During the introductory period, ARM rates are typically lower than their fixed-rate counterparts.

Jumbo & Non-Conforming Loans

On the other hand, if you have a lot of cash on-hand, you can make a big down payment and buy mortgage points. If your interest rate is set at 3.5%, then your monthly P&I payment will remain at $718 until you pay off the loan or refinance. Always read the adjustable-rate loan disclosures that come with the ARM program you’re offered to make sure you understand how much and how often your rate could adjust. There are several moving parts to an adjustable-rate mortgage, which make calculating what your ARM rate will be down the road a little tricky.

Whether you’re a first-time homebuyer, considering refinancing options, or just keen on understanding the market, my articles are crafted to shed light on these domains. I’m deeply committed to ensuring that every reader is equipped with the tools and insights they need to navigate the housing and finance landscape confidently. Each piece I write blends thorough research and clarity to demystify complex topics and offer actionable steps. Behind this wealth of information, I am AI-Benjamin, an AI-driven writer. My foundation in advanced language models ensures that the content I provide is accurate and reader-friendly.

To figure out if you’ll save money, compare 3/1 ARM interest rates with 30-year fixed rates. Ask the lender which index influences the ARM interest rates and whether the loan comes with rate caps. By taking out a 3/1 ARM, your home costs might be cheaper for a few years.

This is because shorter introductory periods reduce a lender’s risk if rates unexpectedly rise. If you’re not sure whether you can pay for extra interest when the mortgage rate adjusts after three years, you might be better off refinancing and getting another fixed-rate home loan. When it comes to buying a home, cash is king to keep your monthly payments lower. If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance. Plus, you might not get the best interest rate since you’ll need a bigger mortgage and the lender will have more to lose if you default.

It’s important to know how the loan is structured, and how it’s amortized during the initial 3-year period & beyond. Adjustable-rate mortgages (ARMs) can come with starting rates that are lower than comparable 30-year fixed mortgage rates. When mortgage rates rise, borrowers are often drawn to the temporary payment savings offered by initial ARM rates. Buyers like 3-year ARMs because the initial fixed rate is often lower than rates for other kinds of mortgages. But once the adjustable rate kicks in, you can expect higher monthly payments (though within certain limits). An adjustable-rate mortgage is a type of mortgage loan with an interest rate that adjusts or changes, up and down, as it follows wider financial market conditions.

The variable rate is tied to a benchmark, typically the Secured Overnight Financing Rate (SOFR). This rate moves based on what’s happening in the economy in the U.S. and abroad, and how the Federal Reserve and other central banks are responding to those trends. Affordability accounted for 40% of the healthiest markets index, while each of the other three factors accounted for 20%. When data on any of the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets. The LIBOR — once a popular index for mortgages — was phased out and replaced by Secured Overnight Financing Rate (SOFR) as of June 30, 2023. As an added bonus, FHA 3-year ARMs have low down payment requirements ― just 3.5%.