Adjustable Rate Mortgages or ARMs

What is an A.R.M.?

An ARM or adjustable-rate mortgage is a home loan where the interest rate changes over time. Most ARMs begin with a fixed interest rate for a set period, commonly the first 5, 7, or 10 years, after which the rate will adjust periodically, usually once a year. The adjustments are based on a market index and a set margin determined by the lender.

During the initial fixed period, your monthly payments would stay the same. Once the adjustment period begins, your payment may increase or decrease depending on how the market moves.

Why Home Buyers Choose an ARM

When used strategically, an ARM can be a smart financial tool.

The biggest advantage of an ARM is the lower initial interest rate. This can make monthly payments more affordable at the start of your loan and can help you qualify for a higher-priced home, or help minimize monthly payments when rates are high.

Many buyers use this loan strategically if they plan to move, sell, or refinance before the first rate adjustment. It allows them to benefit from the lower rate without long-term exposure to rising interest rates.

How Rates Work with an ARM

ARM loans are described by two numbers, such as “5/6 ARM” or “7/6 ARM.” The first number indicates how long your rate stays fixed. The second shows how often the rate can adjust after that period, typically every six months.

For example, with a 5/6 ARM, your rate is fixed for the first five years and then adjusts every six months after that. Each adjustment follows the movement of a specific market index plus a set margin. Most ARMs also have rate caps that limit how much the rate can change at each adjustment and over the life of the loan.

Qualification and Requirements

ARM loans follow similar qualification guidelines to fixed-rate conventional loans. Lenders typically look for:

• A credit score of at least 620
• A minimum down payment of 3% for qualified borrowers
• Proof of stable income and employment
• If you put less than 20% down, you’ll need private mortgage insurance (PMI), which can be removed once you reach 20% equity.

When an ARM Makes Sense

An adjustable-rate mortgage can be a smart choice if:

• You plan to sell or refinance before the rate adjusts
• You want to take advantage of a lower initial rate to save money early on
• You’re confident your income will grow in the future and can handle potential adjustments

Compare Before You Commit

ARMs can offer great savings upfront, but they aren’t for everyone. If you plan to stay in your home for a long time and prefer payment stability, a fixed-rate loan may be the better option. As a mortgage broker, BMC Keystone can help you compare both side by side to decide which structure best fits your financial goals.