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Why Now Might Be the Best Time for an Adjustable-Rate Mortgage

What You'll Learn: How you can still get low interest rates by getting an adjustable-rate mortgage.


If you are searching for a new home, you may see the ads for an adjustable-rate mortgage (ARM) and think, “Wow, these are great rates.”  You might be wondering if an ARM is the right choice for you. It may be. But, ARMs are not as easy to understand as a fixed-rate mortgage. That makes this decision a bit more complicated. Choosing an adjustable-rate mortgage can save some borrowers thousands over what they would pay for a fixed-rate. Then again – other borrowers would better benefit from the fixed-rate loan. Let’s find out why now might be the best time for you to get an ARM.

Why Borrowers Are Choosing an Adjustable-Rate Mortgage

Borrowers choose an adjustable-rate mortgage, an ARM, over a fixed-rate mortgage because the initial interest rate offered may be lower than what they find for a 30-year fixed-rate mortgage.

You can see the trend of ARM rates HERE.

ARMs have a fixed-rate period generally from 3 to 10 years. When you see ARMs listed, they will have a number before a slash and then a second number or number-letter pair.

A 10/1 ARM will have a ten-year fixed period, and then the rate will adjust every year after that ten years until the end of the loan. The adjustment period rate is usually related to the Secured Overnight Financing Rate (SOFR)  plus a margin as follows:

30 day average of SOFR (Index) + (Margin)
A 10/1 ARM is ideal for anyone not planning on owning the property for more than ten years.

Buy – Renovate – Sell

ARMs are particularly popular with some buyers or real estate investors. The lower interest rate lets them buy a larger home, live in it while they renovate, and sell before the rate adjusts. Even an extended renovation period is generally under three years, which is well within an ARMs fixed-rate period. And that gives the owner plenty of time to find a new buyer. With this particular real estate investing strategy, buyers can take advantage of the loan rates that are even lower for someone who will use the house as a primary residence.   
Other investors who do a similar fix and flip style (making quick renovations and selling) can take advantage of an ARM’s lower rate. However, the rate will be higher if it’s not their primary residence.

Today’s ARMS Are Different From Past ARMs

ARMs received a bit of a bad reputation coming out of the 2008 financial crisis. And in the past few years, the rates for mortgages have been so low – even for fixed-rate loans. That’s why few people were interested in getting a lower rate ARM for a shorter time. Now that the rates are starting to go up, there is a renewed interest in finding a better deal tailored to their needs.

ARMs got a bad reputation because those variable rate mortgages provided in 2008 were approved without enough oversight. Borrowers who should not have gotten loans were taking on too much risk. This resulted in many people who would not be qualified today receiving loans. When their fixed-rate period ended and their mortgage payments climbed, they could no longer pay and defaulted on the loan.

This issue has been remedied with more stringent qualification practices to ensure that borrowers understand their loans and are capable of making mortgage payments.

Take Advantage of Lower Rates

Historical data shows that rates are still relatively low for all mortgages. Freddie Mac lists the 30-year fixed-rate mortgages since the ‘70s. The average rates in the 1970s were from 7-11%. The 1980s saw rates from 10 to even 18%, the 1990s fell back to below 10% and down to just under 7%, the 2000s continued to move from 8% down to about 5%, and the 2010s stayed below the 5% mark for much of the decade.

We have seen the 2020s with rates below 3% and now above 4%, and there appears to be a climb beginning. For those that believe they will move in the next ten years, an ARM may be the best way to save on your mortgage.

Thousands in Savings

ARMs may save homeowners a substantial amount over a fixed-rate mortgage for those likely to move within ten years.

Add to that the issue with soaring home prices and bidding wars. When borrowers can get a lower interest rate, they can qualify for more. With these current rates, the savings possible with an ARM over their fixed-rate period could make a difference in buying power.

ARMs Time Has Returned

Now that rates are rising, those looking for a good deal on a mortgage – are considering ARMs again. These adjustable loans can save the right borrower thousands over a fixed-rate. An ARM could be your best option if you are part of the homeowners who will move within the next three to ten years.  

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1Rates are updated daily at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, adjustable rate mortgage(ARM) loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.