Adjustable Rate Mortgage
Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index." Margins on loans typically range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).
Advantages
-
Lower initial interest rate compared to 30-year fixed
-
Lower monthly payments during the fixed period
-
Good for borrowers who plan to sell or refinance early
-
Often easier qualification because the lower start rate improves payment affordability
-
Can be paired with jumbo and non-QM loans
Downpayment Requirements
-
Conventional ARMs - Typically 5%–20% down - Most common: 10% down for strong borrowers First-time buyers may qualify with as little as 5%
-
Jumbo ARMs - Usually 10%–20% down Higher-risk scenarios (investment, lower credit): 20%–30%
-
Non-QM ARMs - Often 10%–20% downSome bank-statement or asset-based ARMs may require 15%–25%
-
Investment Property ARMs -Typically 20%–25% down
-
Second Home ARMs - Usually 10%–20% down, depending on credit and reserves
Eligibility Requirements
-
Credit Score: 620+ (700+ for jumbo/non-QM)
-
DTI: Typically 45% or lower
-
Income: Stable, documented 2+ years
-
Reserves: 2–6 months (6–12+ for jumbo)
-
Down Payment: 5–20% (10–20%+ for jumbo)
-
Property: Must meet appraisal and lender guidelines
-
Documentation: Standard income, asset, and credit paperwork
LEARN MORE ABOUT
ADJUSTABLE RATE MORTGAGES
When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.
(ARM)s Loan FAQ's
What is an Adjustable Rate Mortgage (ARM)?
An Adjustable-Rate Mortgage is a home loan where the interest rate changes over time.
-
It begins with a fixed rate for a set number of years.
-
After that period, the rate adjusts periodically based on market conditions.
ARMs are structured to offer lower initial rates, making the early years of the loan more affordable.
What do 5/6, 7/6, and 10/6
ARM mean?
The numbers represent how the loan works:
-
First number: Length of the fixed-rate period (5, 7, or 10 years).
-
Second number: How often the rate adjusts afterward (every 6 months).
So a 7/6 ARM = 7 years fixed + rate adjusts every 6 months.
What are the drawbacks of
an ARM?
-
Payments can increase significantly after adjustments
-
Harder to predict long-term costs
-
Not ideal for buyers planning to stay long-term
-
Economic volatility can affect payment stability
Get A Quick Quote
Like what you see? Get in touch to learn more.