Interior of home financed with an ARM

What Is An Adjustable-Rate Mortgage?

Holly Shuffett6 minute read
July 06, 2022

Rising interest rates can throw a big wrench in your home buying budget. If you want a chance to enjoy a lower interest rate upfront, then an adjustable-rate mortgage offers a solution. But after a set period of time, that interest rate can change.

If you are willing to take the chance of rising rates to lock in a lower interest rate for now, then an adjustable-rate mortgage just might be the right loan type for you.

Adjustable-Rate Mortgage (ARM) Defined

An adjustable-rate mortgage is a home loan option with an interest rate that usually has an initial low and fixed period, before eventually adjusting to the market and shifting to a higher or lower rate. The initially low rate at the beginning of the loan’s term is usually the most attractive aspect for any home buyer, as it offers a lower payment and can save you thousands in interest compared to a fixed-rate mortgage.

ARMs represent a great option in the mortgage loan process. But when taking out an ARM, the borrower runs the risk that the interest rate may rise after the initial fixed-rate period. But the interest rate could also lower, it all depends on the market at the time the rate adjusts. Regardless, it’s important to consider the potential impacts of a rising rate and payment on your budget before jumping in.

Fixed-Rate Vs. Adjustable-Rate Mortgage

A fixed-rate mortgage offers a stable interest rate for the life of the loan. That steadfast interest rate translates into an unchanging monthly payment.

Unlike a fixed-rate mortgage - where the rate of interest remains steadfast throughout the life of the loan - an ARM’s rate is set below the market rate and adjusts accordingly after the initial period is up. The certainty of a fixed-rate mortgage comes with a price, which is the difference you can save during the fixed period of an ARM when compared to a 30-year rate. Many clients choose the ARMs savings over the certainty of a fixed-rate, and many choose the certainty of the fixed-rate over the savings of the ARM. An ARM versus fixed-rate loan all depends on what works best for every individual’s own financial situation.

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How Does An Adjustable-Rate Mortgage Work?

Adjustable-rate mortgages are offered in 30-year terms, though this can vary from lender to lender. Whether the rate of interest is calibrated on a monthly or a yearly basis, after the initial low-rate period, can also vary across different types of ARMs.

Throughout the adjustment period, the monthly payment will change based on the market interest rate. But the specifics of the changes vary based on the ARM type. Here’s a closer look at the two most common types of ARMs:

  • Hybrid ARM: A hybrid ARM behaves like a fixed-rate mortgage during an introductory period. Throughout this period, the interest rate will remain the same. After the introductory period expires, the interest rate will adjust on a pre-determined schedule.
  • Interest-only ARM: An interest-only ARM only allows interest payments for a set period of years. During that time, you’ll enjoy a lower monthly payment. But after the interest-only period is over, borrowers start paying back the principal in addition to interest, which means the mortgage payment increases.

How Are Rates Determined For Variable Rate Mortgages?

The rate of interest in adjustable-rate mortgages is subject to change depending on general market conditions – which is reflected through an ARM’s index – and the margin set by your lender. An ARM’s margin is a specified amount of percentage points that will be added to the index to set your loan’s rate. This value shouldn’t change after finalizing your loan.

While adjustable-rate mortgages are seen as riskier when compared with the predictability of a fixed-rate mortgage, there are safeguards in place to protect the borrower from any severe spikes in interest. Rate caps – or limits on just how much an interest rate can increase during an adjustment period – can give you a little more peace of mind when it comes to an unpredictable market.

Another surety that some ARMs may have in place is a lifetime cap, or a rate ceiling, which is an overall maximum that the interest rate won’t be able to exceed during the lifetime of the loan.

ARM Loan Options

ARMs come with a variety of home loan options to choose from.

In most cases, adjustable-rate mortgages are represented by a ratio – for example: 5/6 or 7/6. The numerator represents how long the fixed period is and the denominator indicates how frequently the interest rate will change. The fixed-rate period will vary across lenders, but it typically falls between 1 – 10 years’ time.

Here’s a closer look at the most popular ARM options.

5/6 ARM

A 5/6 mortgage has a fixed-rate period of 5 years with an adjustable rate that will fluctuate in accordance with the market for the remainder of the loan’s term. With a 5/6 loan, the rate of interest will adjust annually.

With an annual adjustment period, you can map out your budget a year at a time. 5/6 ARMs are not available through Rocket Mortgage®.

7/6 ARM

The fixed period for a 7/6 loan is 7 years with a rate adjustment once every 6 months for the remaining life of the loan – in this case, your rate will adjust every 6 months for the remaining 23 years.

With a longer fixed-rate period, you have some security built into your budget. 7/6 ARMs are available through Rocket Mortgage.

10/6 ARM

A 10/6 ARM has a fixed-rate period of 10 years. After that period, the adjustable rate will fluctuate every six months. A long fixed-rate timeline allows you to lock in a lower mortgage rate for an extended period of time.

10/6 ARMs are available through Rocket Mortgage. 


Through the FHA, borrowers can tap into several hybrid ARM options with fixed-rate periods of 3, 5, 7 or 10 years. After the initial period, the interest rates adjust annually. When tapping into an FHA loan, you can typically make a smaller down payment and enjoy relatively lax credit requirements.

FHA ARMs (5/6) are available through Rocket Mortgage.


A VA ARM offers hybrid ARMs that come with a lower interest rate upfront. But after the fixed-rate period, the interest rate can increase or decrease. Like all VA home loans, this option is only available to eligible military service members and veterans.

VA ARMs (5/6) are available through Rocket Mortgage.

Jumbo ARM

A jumbo ARM allows the borrower to get a lower initial rate on a jumbo loan up to $2.5 million. Jumbo adjustable-rate mortgage loans are a great way to save a lot of money on interest during the initial lower-rate period. Often, especially on the larger loans, the savings can be in the multiple tens of thousands of dollars.

Jumbo ARMs are available through Rocket Mortgage.

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Who Are ARM Mortgages For?

There are several important things to consider when figuring out if an ARM is right for you:

  • How long are you planning to live on the property?
  • How much you can afford as of right now?
  • How much money will the initial lower-rate period save you?

Short-term homeowners are great candidates for ARM loans, which will have that low interest rate – lower than that of a fixed-rate mortgage – in the beginning. So, if you’re planning on moving after just a few years, an ARM will undoubtedly save you some money in interest.

If you’re a planner, you may have the gut instinct to settle into a fixed-rate mortgage – but an ARM could be the smarter choice. The bottom line is that an ARM will likely save you on interest during the initial fixed period.

Regardless of your circumstances, however, since ARMs are influenced so heavily by the market, you should always keep an eye on interest rates. If you anticipate a drop, an ARM may be the way to go. But steady or rising rates might indicate that a fixed-rate mortgage is a better loan option for the time being.

The Pros And Cons Of ARM Loans

As with all mortgage options, there are some advantages and disadvantages attached to ARM loans.

ARM Loan Pros

  • Initial period: The affordability of the initial period’s payments is perhaps the biggest benefit for many interested in an ARM. The low rates can save the borrower hundreds per month for the first few years of the loan’s duration.
  • Can secure a larger loan: Due to the low rates and the low monthly payments during the initial period of an ARM, borrowers may be able to qualify for a larger loan than with a different loan option.
  • If the market favors you … : If interest rates fall, your monthly payments could drop even lower than before. On top of that, you won’t have to refinance in order to reap these savings benefits!

ARM Loan Cons

  • Instability: For those of us who love planning or stability, the very thought of an ever-changing monthly payment might be a huge turnoff.
  • Not great long-term: Long-term ARMs will typically wind up costing you more than a fixed-rate mortgage, unless you sell or refinance before rates can rise.
  • If the market doesn’t favor you … : Monthly payments can get significantly more expensive than with a fixed-rate mortgage.

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Adjustable-Rate Mortgage FAQs

Can I refinance my adjustable-rate mortgage to a fixed-rate mortgage?

Yes, you can refinance your ARM to a fixed-rate mortgage, and in fact it’s common for homeowners to do so after the initial fixed-rate period ends.

What are the eligibility requirements for an ARM mortgage?

Like all mortgage options, you’ll need to meet the eligibility requirements set by the lender. In general, you’ll need to make a down payment between 3.5% to 5%, have a minimum credit score of 620, and a debt-to-income (DTI) ratio of no more than 50%.

Why are adjustable-rate mortgages bad?

Adjustable-rate mortgages aren’t bad. But they do come with added risks. When you agree to a fluctuating interest rate, your monthly payments will change over the life of the loan. If your budget cannot handle a rising interest rate, that can lead to a financially precarious situation.

When is an ARM a good idea?

An ARM is a great idea for home buyers who plan to sell the home or pay off the mortgage before the fixed-rate period ends. ARMs are also popular for more expensive homes. The larger the mortgage, the more a homeowner can save during the initial fixed-rate period.

The Bottom Line: Is An Adjustable-Rate Mortgage Right For You?

An ARM comes with unique advantages. Although not the right fit for all home buyers, many can benefit from the savings an ARM offers. If you think that an ARM is the right choice for you, then get started online.

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Holly Shuffett

Holly Shuffett is a staff writer who writes with a focus on homeownership and personal finance. She has a B.A. in public relations from Oakland University and enjoys creative writing and reading in her free time.