Adjustable Mortgage (ARM) Rates Today

Current Adjustable-Rate Mortgage Rates

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What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage, or ARM, is a mortgage without a fixed interest rate. Instead, the rate fluctuates according to broader market trends for interest rates. This makes ARMs somewhat unpredictable. Compared to a fixed-rate mortgage — where the rate never changes — the rate you pay on an ARM may rise or fall significantly over the life of the loan. The tradeoff is that adjustable mortgage rates typically start lower than fixed-rate mortgage rates, which means you can save meaningful money if rates remain stable or decline during your initial fixed period.

How Do Adjustable-Rate Mortgages Work?

Adjustable-rate mortgages follow established rules that govern when and how much the rate can change. Most ARMs include caps that limit how much the rate can increase at any single adjustment and over the life of the loan. These terms will be specified in your loan documents and should be clearly understood before closing. Rate adjustments are tied to a specific index chosen by the lender, plus a margin the lender sets on top. The combination of the index value and the margin determines your new rate at each adjustment period. Caps limit how far the rate can move in any direction, protecting borrowers from sudden, drastic changes. Commonly used indexes for ARM rate adjustments include:

• U.S. Treasury notes and bills
• The Secured Overnight Financing Rate (SOFR), which has largely replaced LIBOR as the benchmark for most new ARMs
• The 11th District Cost of Funds Index (COFI), which reflects the weighted average interest rate that financial institutions pay for the funds they use

Most of these indexes are published by financial news outlets, the Federal Reserve, and government websites. Before committing to an ARM, ask your lender which index they use, where it’s published, and whether rate projections are available for that index.

Types of Adjustable-Rate Mortgages

All adjustable-rate mortgages follow a preset schedule determining when the rate can adjust. On most home purchase or refinance loans, the initial rate is fixed for a set number of years — commonly 5, 7, or 10 — after which the rate adjusts periodically to reflect the current index value the lender is using. Note: ARMs are named using a two-number format. The first number is the length of the initial fixed-rate period in years; the second is how frequently (in months or years) the rate adjusts afterward.

ARM Interest Rate Cap Structure

Caps on adjustable-rate mortgages limit how much the interest rate can change at each adjustment period and over the full life of the loan. These caps protect borrowers from sudden, significant rate increases and provide a degree of payment predictability. There are three types of caps on a typical ARM:

• Initial Adjustment Cap: Limits how much the rate can increase at the first adjustment after the fixed-rate period ends.
• Periodic Adjustment Cap: Limits how much the rate can change at each subsequent adjustment (typically annually or every six months).
• Lifetime Cap: Sets the maximum amount the interest rate can increase over the entire loan term, regardless of market conditions.

Here’s an example of a common cap structure in practice. Say you have a 5/1 ARM with an initial interest rate of 3% and a cap structure of 2/2/5:

• The first number (2) is the initial adjustment cap. After the five-year fixed period, the rate cannot increase by more than 2 percentage points at the first adjustment. So a 3% starting rate could rise to no more than 5% at that first adjustment.
• The second number (2) is the periodic adjustment cap. At each subsequent annual adjustment, the rate cannot increase or decrease by more than 2 percentage points from the prior rate.
• The third number (5) is the lifetime cap. Over the full life of the loan, the rate cannot exceed 5 percentage points above the initial rate — meaning a 3% starting rate could never exceed 8%, no matter what happens in the market.

Pros and Cons of an Adjustable-Rate Mortgage

Choosing between an ARM and a fixed-rate mortgage depends on your financial situation, how long you plan to stay in the home, your risk tolerance, and your ability to absorb potential payment increases.

Advantages of Adjustable-Rate Mortgages

• Lower Initial Rates: ARMs typically start with lower rates compared to fixed-rate mortgages, reducing your payment during the fixed period.
• Potential for Lower Payments: If rates remain stable or fall, you may benefit from lower payments both during and after the fixed-rate period.
• Short-Term Planning: If you plan to sell or refinance before the initial fixed period ends, you can capture the lower rate without ever experiencing an adjustment.

Disadvantages of Adjustable-Rate Mortgages

• Rate Volatility: After the fixed period ends, your rate — and payment — can increase meaningfully at each adjustment.
• Risk of Higher Payments: If market rates rise significantly, your monthly payment could jump well above what you originally budgeted for.
• Uncertainty: Future rate adjustments depend on market conditions, making it difficult to predict your long-term housing costs.
• Potential for Negative Equity: If rates rise sharply and home values don’t keep pace, you could find yourself underwater — owing more than the home is worth.

When you’re underwater, options narrow considerably. Refinancing becomes difficult because most lenders require a minimum level of equity. Selling becomes complicated too — if the sale proceeds don’t cover the remaining loan balance, you’d need to bring additional funds to close. This can effectively trap homeowners who need to move. This is why it’s important to monitor market conditions and consider selling or refinancing into a fixed-rate mortgage before your initial rate period ends if you anticipate rates rising.

Is an Adjustable-Rate Mortgage a Good Idea?

Interest rates can go up or down — that’s the defining characteristic of an ARM, and it’s why this type of loan works better for some borrowers than others. ARMs tend to be most beneficial for:

• Short-Term Homeowners: If you plan to sell or refinance within the initial fixed-rate period, you can take advantage of the lower rate without ever reaching the adjustment phase.
• Those Expecting Rate Decreases: Borrowers who anticipate falling rates may find ARMs attractive — the lower initial rate is appealing, and subsequent adjustments could bring the rate down further.
• Financially Stable Buyers: Borrowers with higher incomes or strong cash reserves who can absorb payment increases if rates rise may find the initial savings worth the long-term flexibility.
• Frequent Relocators: Those in professions requiring regular moves — including military personnel — may benefit from the lower initial rate if they’re likely to sell before the adjustment period begins.

Before choosing an ARM, carefully consider your financial situation, long-term housing plans, and your comfort level with rate uncertainty.

Thinking About Refinancing Out of Your ARM?

If you’re approaching the end of your fixed-rate period — or already in the adjustment phase — refinancing into a fixed-rate mortgage can provide the payment stability and long-term predictability that an ARM no longer offers. Locking in a fixed rate now could protect you from future rate increases and make budgeting significantly easier. See today’s refinance rates at Refi.com and find out what a fixed-rate mortgage could look like for your situation — it only takes a few minutes to get a personalized rate.