How Adjustable Rate Mortgages Work

An ARM typically starts with a fixed interest rate for an initial period, which can range from 3, 5, 7, or 10 years, depending on the loan structure. After this introductory phase, the interest rate adjusts periodically—often annually—based on a benchmark index, such as the Secured Overnight Financing Rate (SOFR) or the U.S. Treasury Rate, plus a fixed margin set by the lender.

For example, a 5/1 ARM means the interest rate remains fixed for the first five years and then adjusts once per year thereafter.

Benefits of an Adjustable Rate Mortgage

Choosing an ARM can provide several key advantages:

• Lower Initial Interest Rates: ARMs often start with lower interest rates compared to fixed-rate mortgages, resulting in lower monthly payments during the introductory period.
• Increased Affordability: With a lower starting rate, borrowers may qualify for a larger loan amount, making it easier to afford their dream home.
• Potential Cost Savings: If interest rates decrease in the future, ARM borrowers can benefit from lower payments without needing to refinance.
• Ideal for Short-Term Homeownership: ARMs are well-suited for buyers who plan to sell or refinance before the adjustable period begins, maximizing savings during the fixed-rate phase.

Understanding Rate Adjustments and Caps

To protect borrowers from extreme rate fluctuations, ARMs include rate caps, which limit how much the interest rate can increase or decrease. These caps include:

• Initial Cap: Limits how much the rate can change after the fixed period ends.
• Periodic Cap: Controls the adjustment amount for each subsequent period.
• Lifetime Cap: Sets a maximum limit on how high the interest rate can rise over the loan’s term.

For example, if an ARM has a 5/2/5 cap, the rate can increase by 5% at the first adjustment, no more than 2% in each subsequent adjustment period, and no more than 5% total over the life of the loan.

Is an Adjustable Rate Mortgage Right for You?

An ARM can be an excellent choice for:

First-time homebuyers looking for lower payments in the initial years.
Buyers who plan to move or refinance before the adjustment period begins.
Borrowers expecting future income growth to handle potential rate increases.
Real estate investors who want to optimize cash flow with lower initial costs.

However, if you prefer predictability and long-term stability, a fixed-rate mortgage may be a better option.

Work with an Expert to Find the Best Loan Option

Deciding on an Adjustable Rate Mortgage requires careful consideration of your financial situation and long-term goals. At Andre Gabel with Edge Home Finance, we provide expert guidance to help you explore mortgage options that align with your needs. Whether you’re purchasing a new home or refinancing an existing loan, we’ll ensure you make an informed decision.

Get Started Today

Ready to explore how an Adjustable Rate Mortgage can work for you? Contact Andre Gabel with Edge Home Finance today for a personalized mortgage consultation and discover the best financing options available.