Pros and Cons of an Adjustable-Rate Mortgage

Pros of an Adjustable-Rate Mortgage

The 30-year fixed-rate mortgage is by far the most popular home loan, but that doesn't mean ARMs are without their advantages. Here are a few reasons you might benefit from an adjustable-rate mortgage.

Lower Initial Payments

ARMs usually offer interest rates 0.5% to 0.75% lower than 30-year fixed-rate loans. That lower rate could reduce your monthly mortgage payment by thousands of dollars during the initial fixed period. For this reason, ARMs are particularly beneficial to many first-time buyers or borrowers on tight budgets.

Flexibility

If you're planning to sell or refinance within a few years, an ARM could keep your mortgage costs lower while you're in the home. If you're considering this strategy, make sure any prepayment penalties on the mortgage aren't so high they'd offset any savings you'd gain. Also, be aware that market conditions change, and if the housing market slows, it could be hard to sell your home when you planned.

Interest Rates May Drop

ARMs have variable rates that are usually tied to a benchmark, such as the Secured Overnight Financing Rate (SOFR) or the U.S. Treasury. That means your annual percentage rate (APR) may adjust up or down after the initial fixed term. While you should always plan for your rate and monthly payment to climb, they could also fall. If interest rates are high during your fixed period, they may start to drop by the time your loan begins adjusting.

Rate Caps

Most ARMs cap how much your rate can increase, which helps if you're concerned about extreme jumps in your rate. Check the loan documents for period and lifetime caps to see how your mortgage might be affected. A periodic cap limits the amount the rate can increase from one adjustment period to the next, while a lifetime cap limits the total amount the rate can increase over the introductory rate. Some ARM loan agreements also specify payment caps—limits on the amount your monthly payment can rise each readjustment period.

Cons of an Adjustable-Rate Mortgage

An adjustable-rate mortgage can help you save money in some instances, but it also comes with risks you must consider first.

Monthly Payment Can Increase

When the adjustable period begins, your mortgage rate and monthly payments may go up. While rate caps help prevent your rate from spiking too much, the higher payment can still sting. If you're not prepared, that added cost could strain your budget and make it harder to manage your other expenses.

May Require a Larger Down Payment

The minimum down payment on a conventional ARM is typically higher than with other types of mortgages. By contrast, some conventional fixed-rate mortgages require as little as 3% down payment. However, you may qualify for a government-backed mortgage like a Federal Housing Authority (FHA) ARM with only 3.5% down or a Veterans Affairs (VA) ARM that doesn't require a down payment.

Learn more: Should You Put Down 20% on a Home? Consider the Pros and Cons

Refinancing Can Be Costly

If your current interest rate is high, you may be tempted to refinance into an adjustable-rate mortgage for its lower intro rate. In this scenario, you'd aim to refinance before the fixed-rate period ends, ideally at a much lower interest rate. Remember, however, that closing costs on a refinance can range from 2% to 6% of the loan, which might end up being more than you'd save during an ARM's intro period.

Plans Don't Always Work Out

Even the best-laid plans don't always work out. You may take out an ARM under the assumption you'll sell or refinance before the rate goes up, but that's not always possible. Depending on the state of the housing market, changes in your income or other factors, you could be stuck in the home and unable to sell or refinance it. In a worst-case scenario, you could lose the home to foreclosure if you can't keep up with the monthly payments.

Should You Get an Adjustable-Rate Mortgage?

As with any financial product, you should get an adjustable-rate mortgage only if it helps you reach your goals and fits within your overall financial plan. Just as important, you must run the numbers beforehand to make sure you can comfortably afford the payments now, and in the future when its rates are likely to climb. Here are some scenarios where an ARM might benefit you, and others where a fixed-rate mortgage or another alternative would make more sense.

You Might Consider an ARM If:

• You only plan to stay in your home for a few years. If you suspect you'll be moving within a few years, an ARM could help you save money while you're living in the home. For example, if you took out a $500,000 mortgage with a 5/1 ARM and a 6.25% rate, you'd make monthly payments of $3,078 for the first five years. By contrast, a 30-year fixed-rate mortgage with a 6.75% rate on the same house would come with $3,243 monthly payments. Over five years, the ARM savings would amount to $9,990.
• You plan to refinance later. An ARM can help you get into a home now with a more affordable loan. Refinancing after the initial fixed period ends could help you save money in the loan's early years. Keep in mind, though, your lender may charge a prepayment penalty for refinancing before the adjustment period begins, and mortgage rates could also be higher when you're ready to refinance.
• You're buying during a high-rate environment. When interest rates are elevated, a lower initial rate and payment could help you qualify for a mortgage more easily. This strategy might make sense if you expect rates to drop and plan to refinance at that time.

You May Want to Avoid an ARM If:

• You're risk-averse. If you're uncomfortable with unknowns, like how much your rate and mortgage payment could rise in the future, an ARM might not be worth it. You may prefer the predictability of a stable, fixed-rate mortgage.
• The cost of refinancing outweighs the savings. Getting a lower-rate ARM now and refinancing later may help you save money—but not always. Closing costs on a refinance can run thousands of dollars, so you'll need to make sure the long-term savings outweigh the refinancing costs.

Alternatives to an Adjustable-Rate Mortgage

If you're not keen on crossing your fingers with an ARM, you're not alone. In March 2025, ARM mortgage applications made up only 6.3% of all mortgage applications, according to the Mortgage Bankers Association. You might consider other mortgage options that offer flexibility and money-saving benefits.

• Fixed-rate mortgage: No matter which way interest rates fluctuate, you have the peace of mind of knowing your rate and payment amount will never change for the life of the loan. You won't benefit if rates drop, but you'll avoid an increase if they rise.
• Government-backed mortgage: These loans often come with low or no down payment requirements and more lenient qualifications. FHA loans allow as little as 3.5% down with mortgage insurance. VA loans don't require a down payment or private mortgage insurance (PMI) for qualified borrowers. U.S. Department of Agriculture (USDA) loans offer 0% down for eligible rural buyers with low to moderate income.
• Jumbo loan: A jumbo loan is a good option if you're buying a high-priced home that exceeds conforming loan limits. It allows you to borrow more without having to take out an additional loan to cover the difference. Higher loan amounts mean more risk for the lender, so these loans are often harder to qualify for than other mortgages. For example, you may need a larger down payment and a FICO^® Score^☉ of at least 700.

Better Credit Could Help You Get a Lower Mortgage Rate

An adjustable-rate mortgage could help you qualify for a mortgage, often with an initial rate lower than you'd find on a comparable fixed-rate loan. The potential savings during the fixed-rate period could make it more affordable to buy a home, as long as you're aware the rate may increase once that period ends.

You could also get a lower rate by putting down a larger down payment, lowering your debt-to-income ratio and boosting your credit profile. On that last point, check your credit report and FICO^® Score from Experian for free to discover any issues that may be harming your credit. If needed, take steps to improve your credit before applying for a new mortgage.