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Adjustable-rate mortgages

A lower rate up front, in exchange for uncertainty later

An ARM is fixed for an initial period, then adjusts periodically within set limits. It can be the right tool for a defined time horizon, and the wrong one if you plan to stay put.

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Often considered by

  • Buyers with a shorter expected hold
  • Borrowers comparing structures

Worth weighing

  • Your payment can change after the fixed period ends
  • Refinancing later is not guaranteed and depends on future conditions

The five parts of an ARM

These determine everything about how your payment can move. Any ARM you are offered should be explained in exactly these terms.

  1. Initial fixed period

    How long the starting rate is locked, commonly expressed as the first number in a name like 5/6 or 7/6.

  2. Index

    A published benchmark rate your loan tracks. Neither you nor the lender controls it.

  3. Margin

    A fixed amount added on top of the index. This does not change, and it is set at the start, so it is worth comparing between offers.

  4. Adjustment frequency

    How often the rate can change once the fixed period ends. Every six months on a 5/6, for example.

  5. Rate caps

    Limits on how much the rate can move at the first adjustment, at each later one, and across the life of the loan.

The part that deserves your attention

An ARM should make sense even in its worst case, because the worst case is a real possibility, not a hypothetical.

Refinancing later is not a guarantee

“You can always refinance before it adjusts” is one of the most common things people are told, and it is not something anyone can promise. Refinancing depends on rates, your equity, your credit and your income at that future point.

Before you choose an ARM, we will show you the maximum payment its caps allow. If that number would be a problem, the ARM is not right for you, whatever the starting rate looks like.

ARM compared with a fixed rate

Adjustable rate

Starting rate
Often lower
Payment certainty
Only during the fixed period
Best suited to
A defined, shorter time horizon
Main risk
Payment rises after the fixed period
If plans change
Exposure you did not plan for

Fixed rate

Starting rate
Often slightly higher
Payment certainty
For the whole term
Best suited to
Staying put, or wanting certainty
Main risk
Paying more if rates fall
If plans change
Nothing changes

Who an ARM tends to suit

Someone with a genuine reason to expect a shorter hold. A known relocation, a property they intend to sell, or a plan already in motion. The saving during the fixed period is real, and if you are gone before it ends, the adjustment never affects you.

If you are buying a home you hope to stay in, and a higher payment in five years would cause real difficulty, a fixed rate is almost certainly the better answer. We would rather tell you that now than sell you the lower starting number.

Step 1 of 4

Compare adjustable-rate options

Rates depend on more than the market. A few details let us quote your actual scenario.

Common questions

Worth comparing

Jumbo Loans

Financing above conforming loan limits.

  • Fixed and adjustable options
  • Primary and second homes
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Not sure this is the right fit?

Program availability and qualification depend on your details and the property. The fastest way to find out is to ask.

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