How ARM Rates Work 3-Year, 5-Year, 7-Year, And 10-Year ARMs

The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence.

How to Evaluate a 3-Year ARM Mortgage

However, some borrowers who had 3/1 ARMs in the past may still be paying them off.

Fully-indexed rate

During periods of higher rates, ARMs can help you save money in the early days of your loan by securing a lower initial rate. Just keep in mind that after the introductory period of the loan, the rate — and your monthly payment — might go up. When shopping for a 3 year mortgage rate, the initial rate should be of less concern than other factors. The margin amount, the caps, the maximum lender fees and the potential for negative amortization and payment shock should all weigh more in your decision than the initial rate.

How a 3/1 ARM works

• If you claim the mortgage interest deduction with a 3/1 ARM, don’t be surprised if your tax savings are relatively low, at least for the first three years of your loan term.
• The LIBOR — once a popular index for mortgages — was phased out and replaced by Secured Overnight Financing Rate (SOFR) as of June 30, 2023.
• To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors.
• The main differentiator with these loans is the length of the introductory period, during which the interest rate stays fixed.
• ARM rates are more complicated than those of fixed-rate mortgages, so shopping for them is a little different also.

Instead of refinancing from an adjustable-rate mortgage to a fixed-rate, they’ll refinance to an ARM, such as a 3/1 ARM. It might be a good move for short-term lower interest rates if you plan on moving in a few years. But if you’re refinancing and you want to stay in your house for the remainder of your loan term, getting a 3/1 ARM might not make sense. It’s important to run the numbers to see both the costs and the potential savings of either option. An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change at regular intervals following an initial fixed period. With a 3/1 ARM, the initial interest rate remains fixed for three years.

• For this example, we assume you’ll take out a 5/1 ARM with 2/2/6 caps and a margin of 2%, and it’s tied to the Secured Overnight Financing Rate (SOFR) index, with an 5% initial rate.
• For today, Monday, January 06, 2025, the national average 5/1 ARM interest rate is 6.53%, flat compared to last week’s of 6.53%.
• At Bankrate, I’m focused on all of the factors that affect mortgage rates and home equity.
• In addition to regular rate resets, these loans typical get recast every 5 years or whenever a maximum negative amortization limit of 110% to 125% of the initial loan amount is reached.
• A 3/1 adjustable-rate mortgage (ARM) is a type of home loan that has a fixed interest rate for an introductory period, then a variable rate once the intro period ends.
• But if you’re unsure how long you plan to stay in the home, a 7/1 or 10/1 ARM might be a safer choice.
• The interest rate is fixed for three years, then adjusts annually for the following 27 years.
• Generally the rates on these loans are slightly higher than other 3-year loans, since there is less potential profit to the lender.

Introduction to 3/1 ARM Mortgages

But if the rate increases, your monthly mortgage payments will also rise. A 3/1 ARM can be a good idea if you plan to refinance your home before the fixed period expires. Low initial rates can translate to lower monthly payments during the first few years of your mortgage. With a fixed-rate mortgage, you’ll have consistent, predictable monthly payments throughout the life of your loan. A 3-year ARM has a fixed “teaser” interest rate for the first three years of the loan. After that, the interest rate adjusts on a recurring schedule, typically every six months.

• The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination.
• A 5/1 ARM, for example, comes with a five-year initial period during which the rate is fixed.
• Let’s say you’re looking to buy a home worth $200,000 with a 20% down payment.
• 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.
• It can be confusing to understand the different numbers detailed in your ARM paperwork.
• With an interest-only loan you are paying only the interest for the initial 3 year period.
• Interest-only loans can give you even lower starting monthly payments than typical ARMs.

ARM adjustments in action

With a hybrid loan the principle is being amortized over the entire life of the loan, including the initial three year period. This is generally the safer type of 3-year ARM for most people, since there is no potential for negative amortization. Generally the rates on these loans are slightly higher than other 3-year loans, since there is less potential profit to the lender. The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary.

• When you get a mortgage, you can choose a fixed interest rate or one that changes.
• A 5/1 ARM rate gives you an initial rate that’s fixed for five years, and then adjusts every year for the rest of the loan’s term.
• Calculate 3/1 ARMs or compare fixed, adjustable & interest-only loans side by side.
• Prior to Bankrate, I wrote and edited for Rocket Mortgage/Quicken Loans.
• This can help you understand what your ARM would look like if rates were to spike and stay high.
• A 30-year fixed-rate mortgage at 5.34% would cost you roughly $1,004 per month.
• 3-year ARM interest rates are based on the SOFR (Secured Overnight Financing Rate), so they change every day.

When is it a good idea to get an adjustable-rate mortgage?

Yes, you can refinance your ARM to a fixed-rate loan as long as you qualify for the new mortgage. Yes, you can refinance an ARM just as you can any other mortgage loan. ARM requirements are similar to the minimum mortgage requirements for fixed-rate loans, but with a few significant differences. Especially if you expect interest rates to drop in the next three years, you may want to refinance with a conventional fixed-rate loan.

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The ARM’s rate can then rise, fall or stay the same, depending on the movements of the broader market. A 3-year adjustable-rate mortgage functions a lot like any other ARM. The main differentiator with these loans is the length of the introductory period, during which the interest rate stays fixed.

Fixed-Rate & Adjustable-Rate Loans

To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors. Bankrate has reviewed and partners with these lenders, and the two lenders shown first have the highest combined Bankrate Score and customer ratings. You can use the drop downs to explore beyond these lenders and find the best option for you. For instance, if you expect to own your house for only three to five years, look at 3/1 and 5/1 ARMs. But if you’re unsure how long you plan to stay in the home, a 7/1 or 10/1 ARM might be a safer choice.

VA Loans

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.

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.

Can I refinance an ARM to a fixed-rate mortgage?

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 best 3 year fixed rate mortgage 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%.

The most common initial fixed-rate periods are three, five, seven and 10 years. Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months. The best way to get an idea of how an ARM can adjust is to follow the life of an ARM.

What’s the 3-year ARM rate?

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.

Not having a prepayment penalty allows you to pay off your mortgage early if you are ever able. Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky-high rates. These caps limit how much interest rates can increase once interest rates adjust. There are interest rate caps that limit how high interest rates can climb each year as well as ones that prevent interest rates from rising too much over the course of the entire loan term.

After this fixed period, the rate becomes variable, changing once per year. The first adjustment is capped at 5%, limiting the increase in the interest rate and reducing the risk of payment shock. The margin acts as the floor, meaning the interest rate can never be lower than 3%, no matter how much the index rate decreases.

Margin

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.

Apply with a few mortgage lenders and see who offers the lowest rate for that type. The intro rate on a 3/1 ARM should be lower than the rate on a 5/1 ARM due to its shorter introductory period. If you’re buying a house, keep in mind that you might have to pay a real estate title transfer tax in addition to property taxes. If you decide to sell your home later on, doing so could increase your tax bill.

• Only when you’ve determined you can live with all these factors should you be comparing initial rates.
• The 7-year ARM rate can increase by up to 5% at the first adjustment and up to 1% at subsequent adjustments.
• If, for example, Treasury bill yields go up, your lender will increase your ARM rate.
• The interest on your loan will be whatever the index rate is, plus a margin the lender adds.
• 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.
• But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment.

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.