Adjustable-Rate Mortgage (ARM) Rates

How Adjustable-Rate Mortgage (ARM) rates are set

An adjustable-rate mortgage starts with a fixed rate for an introductory period and then adjusts at set intervals for the rest of the term. The most common products today are labeled 5/6, 7/6 and 10/6: the first number is the years the rate is fixed and the second is how often it adjusts afterward (every six months). Older ARMs adjusted annually and were labeled 5/1 or 7/1.

After the fixed period, the new rate equals a published index plus a margin set in your note. Nearly all new ARMs use the 30-day average SOFR (Secured Overnight Financing Rate) as the index. The margin, often around 2.75 to 3 percentage points, does not change. Caps limit how far the rate can move: a typical structure is 2/1/5, meaning up to 2 points at the first adjustment, 1 point at each later adjustment and 5 points above the start rate over the life of the loan.

The initial ARM rate is usually lower than the 30-year fixed rate because the lender is protected from rate increases after the fixed period ends. How much lower depends on the shape of the yield curve. When short- and long-term yields are close together, the ARM discount shrinks and can occasionally disappear; when long-term yields are well above short-term yields, ARMs look far more attractive.

Conforming ARMs are underwritten on a qualifying rate that accounts for possible adjustments, so the initial payment savings do not always translate into a larger loan approval. Jumbo ARMs are especially common because portfolio lenders like the shorter effective duration.

An ARM fits best when you have a realistic plan to sell or refinance before the fixed period ends, or when you can absorb the maximum payment under the caps if that plan changes. Ask for the worst-case payment schedule alongside the initial payment before deciding.

Rates shown could change or may not be available at commitment or closing.