3 1 ARM: Your Guide to 3-Year Adjustable-Rate Mortgages

Even with an interest rate cap in place, managing your money and sticking to a budget can be difficult when you’re not sure how much your mortgage will cost you. That’s the biggest drawback of having an adjustable-rate mortgage. One way to look at it is if you were buying a home for $225,000 with 20% down.

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After seven years, your payments will fluctuate every six months based on the new interest rate. The 5/1 ARM is virtually identical to the 7/1 ARM, except that the start rate will adjust after the first five years, rather than seven years. In addition, the intro rate on a 7/1 ARM will be higher than on a 5/1 ARM because you get to hold onto the fixed rate for a longer time. The minimum credit score and the maximum debt-to-income ratio that you’re required to have will vary depending on your mortgage lender. But if your FICO credit score is below 620, you might not be able to qualify for a conventional loan. That means that you might only be able to get a mortgage that’s backed by the FHA (first-time homebuyers) or the USDA (those buying a home in a rural area).

When do ARM rates adjust?

Oftentimes, lenders check your ARM eligibility based on the loan’s fully-indexed rate, which is the highest it could go after adjusting. This protects you as a borrower because it helps ensure you can afford your payments if the rate increases later on. But it also means you don’t get the benefit of qualifying at the ultra-low intro rate. Lenders typically use the fully-indexed rate to qualify you for an ARM loan, rather than the lower intro rate. This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires. In this way, an adjustable-rate mortgage works differently than one with a fixed interest rate.

1 ARM: Your Guide to 3-Year Adjustable-Rate Mortgages

During periods of higher rates, ARMs can help you save money in the early days of your loan by securing a lower initial rate. Just keep in mind that after the introductory period of the loan, the rate — and your monthly payment — might go up. When shopping for a 3 year mortgage rate, the initial rate should be of less concern than other factors. The margin amount, the caps, the maximum lender fees and the potential for negative amortization and payment shock should all weigh more in your decision than the initial rate.

• The offers that appear on this site are from companies that compensate us.
• The FHFA also publishes a Monthly Interest Rate Survey (MIRS) which is used as an index by many lenders to reset interest rates.
• With today’s rates on the rise from their historic lows, ARMs are becoming more attractive to home buyers and homeowners alike.
• Then, go over your budget and figure out if you can afford to pay the mortgage at its peak rate.
• I enjoy distilling data and expert advice into takeaways borrowers can use.
• If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments.
• Eligible military borrowers have extra protection in the form of a cap on yearly rate increases of 1 percentage point for any VA ARM product that adjusts in less than five years.

Jumbo loans

Kim Porter is an expert on credit, mortgages, student loans, and debt management. Yes, if your ARM loan comes with a “conversion option.” Lenders may offer this choice with conditions and potentially an extra cost, allowing you to convert your ARM loan to a fixed-rate loan. An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

1 adjustable-rate mortgage vs. fixed-rate mortgage

• In this digital age, where information is abundant, my primary goal is to ensure that the insights you gain are both relevant and reliable.
• That means that you might only be able to get a mortgage that’s backed by the FHA (first-time homebuyers) or the USDA (those buying a home in a rural area).
• The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan.
• If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance.
• For instance, if the SOFR rate is 2.0% and your margin is 2.5%, your ARM interest rate would be 4.5 percent.

Interest-only loans can give you even lower starting monthly payments than typical ARMs. But your monthly payments will go up once principal payments and rate adjustments kick in. Here’s a comparison of ARM loan payments against the two most popular types of fixed-rate mortgages, with all other things being equal, assuming an adjustment to the maximum payment cap. I’ve covered mortgages, real estate and personal finance since 2020.

Can I switch from an ARM to a fixed-rate loan without refinancing?

A 5/1 ARM, for example, has a fixed rate for five years, while a 3/6 ARM has a fixed rate for three. After that fixed-rate period, your lender will adjust your interest rate on a scheduled basis for the remainder of your 30-year loan term. With an interest-only loan you are paying only the interest for the initial 3 year period. Your payment is smaller for the initial period, but you aren’t paying back any principle. With some I-O mortgages the interest rate is adjusting during the initial I-O period, which gives a potential for negative amortization.

Fully-indexed rate

Not having a prepayment penalty allows you to pay off your mortgage early if you are ever able. Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky-high rates. These caps limit how much interest rates can increase once interest rates adjust. There are interest rate caps that limit how high interest rates can climb each year as well as ones that prevent interest rates from rising too much over the course of the entire loan term.

Interest-only ARM

• It’s important to run the numbers to see both the costs and the potential savings of either option.
• One of the things to assess when looking at adjustable rate mortgages is whether we’re likely to be in a rising rate market or a declining rate market.
• Instead of refinancing from an adjustable-rate mortgage to a fixed-rate, they’ll refinance to an ARM, such as a 3/1 ARM.
• With a fixed-rate mortgage, you’ll have consistent, predictable monthly payments throughout the life of your loan.
• As a general rule, the shorter your fixed-rate period is, the lower your interest rate will be.
• If you chose a 3/1 ARM with 6.63% rate, you’d pay roughly $1,153 per month in mortgage interest and principal.
• Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months.

Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over. If you’re afraid that you’ll get stuck with a high interest rate beginning with the 37th month of your loan term, you can try to refinance for a fixed-rate mortgage. But if rates are falling and your credit score is excellent, refinancing might be worth it to save you money in the long term.

Considerations and Risks

This is because shorter introductory periods reduce a lender’s risk if rates unexpectedly rise. If you’re not sure whether you can pay for extra interest when the mortgage rate adjusts after three years, you might be better off refinancing and getting another fixed-rate home loan. When it comes to buying a home, cash is king to keep your monthly payments lower. If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance. Plus, you might not get the best interest rate since you’ll need a bigger mortgage and the lender will have more to lose if you default.

Adjustable-rate mortgage FAQ

So after the 5-year fixed-rate period, your rate can adjust once per year for the next 25 years, or until you refinance or sell the home. Almost all ARM loans today are “hybrid ARMs.” These have an initial period of 3-10 years where the interest rate is fixed. In fact, these initial introductory 3/1 arm rates today rates — sometimes called “teaser rates” — are often lower than those of a fixed-rate loan. With a 3/1 ARM, your mortgage rate is fixed for three years and then adjusts once a year for the rest of the loan term. At the beginning of your mortgage, ARMs work just like fixed-rate loans.

Features of 3-Year ARM Mortgage Rates

Though 3-year loans are all lumped together under the term “three year loan” or “3/1 ARM” there are, in truth, more than one type of loan under this heading. Understanding which of these types are available could save your wallet some grief in the future. Some types of 3-year mortgages have the potential for negative amortization. This table does not include all companies or all available products. The 7-year ARM rate can increase by up to 5% at the first adjustment and up to 1% at subsequent adjustments.

Historical Mortgage Rates

Then, based on several factors, the rate may increase or decrease once a year for the rest of your loan term. It allows you to choose among four types of payment types in any given month. Generally these types of loans, while offering some flexibility to those with uneven incomes, have the greatest potential downside, since the potential for negative amortization is great.

Editorial Independence

• It’s common for homeowners to refinance into a fixed-rate mortgage before their ARM’s first adjustment.
• The advantage is that borrowers initially have access to mortgage rates that are usually lower than the ones available to people interested in 15-year or 30-year fixed-rate mortgages.
• If no results are shown or you would like to compare the rates against other introductory periods you can use the products menu to select rates on loans that reset after 1, 5, 7 or 10 years.
• Before the 2008 housing crash, lenders offered payment option ARMs, giving borrowers several options for how they pay their loans.
• As mentioned above, a hybrid ARM is a mortgage that starts out with a fixed rate and converts to an adjustable-rate mortgage for the remainder of the loan term.
• If a personal loan isn’t right for you, you might consider one of the following alternatives.

The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence.

• Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.
• Hybrid mortgages, like a 3/1 ARM, provide a variety of benefits, but come also with downsides.
• But this compensation does not influence the information we publish, or the reviews that you see on this site.
• Teaser rates on a 3-year mortgage are higher than rates on 1-year ARMs, but they’re generally lower than rates on a 5 or 7-year ARM or a fixed rate mortgage.
• An adjustable-rate mortgage is a home loan that features an interest rate that changes over time.
• After seven years, your payments will fluctuate every six months based on the new interest rate.

For this example, we assume you’ll take out a 5/1 ARM with 2/2/6 caps and a margin of 2%, and it’s tied to the Secured Overnight Financing Rate (SOFR) index, with an 5% initial rate. An adjustable-rate mortgage is a home loan with an interest rate that changes during the loan term. Most ARMs feature low initial or “teaser” ARM rates that are fixed for a set period of time lasting three, five or seven years. If you expect a promotion or higher-paying job, you may not mind the higher monthly payments that come after your fixed-rate period ends. A one-time windfall, like an inheritance, can also let you pay off your mortgage before the higher monthly payments start.

Yes, you always have the option to refinance an ARM into a fixed-rate loan — as long as you can qualify based on your credit, income and debt. You can use the savings to pay off your mortgage faster and build home equity. Alternatively, you can use the funds for other financial goals, like saving for college or retirement.

At Bankrate, I’m focused on all of the factors that affect mortgage rates and home equity. I enjoy distilling data and expert advice into takeaways borrowers can use. Prior to Bankrate, I wrote and edited for Rocket Mortgage/Quicken Loans.

To figure out if you’ll save money, compare 3/1 ARM interest rates with 30-year fixed rates. Ask the lender which index influences the ARM interest rates and whether the loan comes with rate caps. By taking out a 3/1 ARM, your home costs might be cheaper for a few years.

Generally, the longer the I-O period, the higher the monthly payments will be after the I-O period ends. These loans are generally priced more attractively initially, because there is more potential profit for the lender. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.