If you're looking to finance a home purchase, you've probably seen options for adjustable-rate mortgages (ARMs).
ARMs are a popular choice, especially for borrowers hoping mortgage rates will go down. Their interest rate is fixed for an initial period and then fluctuates at set intervals for the remainder of the term.
Here's what to know about ARMs, including how they work, their pros and cons and the best lenders for these kinds of loans.
What is an adjustable-rate mortgage?
An adjustable-rate mortgage (ARM) has a rate that fluctuates over set intervals.
During the initial repayment period, which is typically between five and ten years, your rate will stay the same. It will probably be lower than the rate you'd get with a fixed-rate mortgage.
The trade-off, however, is that once the introductory phase ends, your rate adjusts every six or 12 months for the remainder of your term. Those rate changes are tied to market fluctuations, so if there's a drop in the benchmark index your lender selects when your ARM resets, your rate will go down. If there's an increase in that benchmark, however, that rate will go up.
Your mortgage offer will detail your initial interest rate and the frequency of rate fluctuations. After closing, the only way to change these terms is to refinance to another ARM or to a fixed-rate mortgage.
ARM terms are typically listed as a fraction — the top number is your fixed introductory period and the lower figure is the frequency at which the rate will fluctuate afterward. A 5/1 ARM, for example, has a set rate for five years and then it resets every year. A 5/6 ARM has a five-year fixed period, then adjusts every six months.
The most common terms for ARMs are 5/1, 5/6, 7/1, 7/6, 10/1 and 10/6.
Best adjustable-rate mortgage lenders
Most lenders offer ARMs, but we've selected three of the best options based on affordability, ease of applying, customer satisfaction, unique benefits and other factors.
Best customer service: Rocket Mortgage
Rocket Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages are available.
Types of loans
Conventional loans, FHA loans, VA loans, Jumbo loans, low-down-payment mortgages
Terms
10-, 15- and 30-year fixed-term conventional loans, 30-year VA and FHA loans, custom mortgages with fixed-rate terms from 8 to 29 years.
Credit needed
620 for conventional loans
Minimum down payment
0% for VA, 1% for RocketONE+, 3% for conventional, 3.5% for FHA, 10% to 15% for jumbo
Already have a mortgage through Rocket Mortgage or looking to start one? Check out the Rocket Visa Signature Card to learn how you can earn rewards.
Read our review of Rocket Mortgage
Rocket Mortgage ranked second in J.D. Power's 2024 U.S. Mortgage Origination Satisfaction Study and has an A+ from the Better Business Bureau, making it a top pick for customer satisifaction. It routinely makes our best mortgage lenders lists, including best for first-time buyers, best online lenders, and best for a low down payment.
The largest mortgage originator in the U.S., Rocket offers ARMs with 7/6 and 10/6 terms, and borrowers can also apply for adjustable-rate FHA, VA and jumbo loans.
Best for in-person experience: Chase Bank
Chase Bank
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, DreaMakerâ„ loans and Jumbo loans
Terms
10 – 30 years
Credit needed
620
Minimum down payment
3% if moving forward with a DreaMakerâ„ loan
Terms apply.
Offers first-time homebuyer assistance?
Yes — click here for details
Chase Bank has over 4,800 branches in 48 states and the District of Columbia, the most of any bank in the U.S. In addition, Chase offers lower-than-average rates and current bank customers can qualify for a mortgage rate discount of up to 0.25%.
Chase offers 5/6 and 7/6 ARMs and 10/6 interest-only jumbo ARMs.
Best for military and veterans: First Federal Bank
First Federal Bank Mortgage Lenders
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional, fixed-rate, adjustable-rate, VA, FHA, USDA, refinance, jumbo
Terms
Conventional: 15, and 30-year; ARM: Â 3/1, 5/1, 7/1 and 10/1
Credit needed
620 for conventional
Minimum down payment
3.5% with an FHA loan; 0% with VA or USDA loan
Kansas-based First Federal Bank doesn't charge lender fees on VA loans, which can normally be as much as 6% of your loan total, and received an A+ from the Better Business Bureau
First Federal offers ARMs in terms of 3/1, 5/1, 7/1 and 10/1. Down payment assistance grants are available to Floridians in select areas, but mortgages are available nationwide.
ARM lenders comparison chart
| Minimum credit score required | ARM loan types | Better Business Bureau rating | |
|---|---|---|---|
| Rocket Mortgage | 620 | FHA ARM, VA ARM, 7/6 ARM, 10/6 ARM | A+ |
| Chase Bank | 620 | 5/6 ARM, 7/6 ARM, 10/6 interest-only jumbo ARM | A+ |
| Ally Bank | 620 | 7/6 ARM | A |
Pros and cons of adjustable-rate mortgages
Pros
- Lower introductory rate. You'll start with a lower interest rate than with a fixed-rate mortgage.
- Your mortgage payment could decrease. If rates decrease by the time your ARM resets, your monthly mortgage payments will shrink.
- Option to refinance. You can refinance your ARM mortgage it into a fixed-rate mortgage.
Cons
- Your rate could increase. After the fixed period ends, your rate will change at regular intervals. Hopefully, it will drop, but it could rise.
- Monthly payments will fluctuate. A fixed-rate loan allows you to predict housing costs throughout the life of your loan. With an ARM, your monthly payments could fluctuate greatly every six months.
- Penalty for refinancing. If you refinance to get a lower rate, your lender could hit you with a prepayment penalty.
FAQ
How is an adjustable-rate mortgage different from a fixed-rate mortgage?
Fixed-rate mortgages maintain the same interest rate over the loan's term. Adjustable-rate mortgages have a fixed rate for a set number of years. After that, the rate resets every six months or year.
Who is an adjustable-rate mortgage good for?
ARMs can benefit a variety of homebuyers, especially if you don't expect to stay in the house for more than a few years. If you have a 7/1 ARM and plan on selling within four years, you would benefit from the lower initial rate. If you expect rates to drop by the time your initial fixed phase expires, an ARM could also be a good idea.Â
What is the main downside of an adjustable-rate mortgage?
The biggest risk of an ARM is that, after the initial fixed-rate period expires, your rate could increase, pushing up your monthly mortgage payment.
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