What Is an Adjustable-Rate Mortgage?

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage is a type of mortgage loan that offers a fixed interest rate for a set period of time, after which the rate can change based on economic conditions. This arrangement differs from a fixed-rate mortgage (FRM), where the interest rate stays the same for the life of the loan.

The interest rate on an ARM is fixed for an initial period, typically at a lower rate than a comparable FRM. After that period ends, the rate fluctuates with the current market rates.

During the variable-rate period, your interest rate can change every six or 12 months based on an underlying benchmark, such as the Secured Overnight Financing Rate (SOFR) or the prime rate, and a margin set by the lender.

Learn more: What Is the Prime Rate?

Adjustable-Rate Mortgage vs. Fixed-Rate Mortgage

Fixed-rate mortgage loans tend to be more popular than adjustable-rate mortgages because they offer more predictability. In fact, just 6.3% of mortgage applications in late March 2025 were for ARMs, according to the Mortgage Bankers Association.

Understanding the key differences between the two options can help you determine which one is the better option for you.

With an FRM, you know your total interest costs upfront, but that's not the case with ARMs. While an ARM can save you money with a lower rate during the initial period, your total costs can be higher if market rates go up over time.

ARMs tend to be more appealing when interest rates are high because of their lower initial rate. Many borrowers opt for an ARM with the hope that interest rates will go back down and they can refinance their loan at a lower fixed rate before their initial period ends.

If rates increase, though, ARM borrowers may have difficulty keeping up with their monthly payments.

How Does an Adjustable-Rate Mortgage Work?

When you first take out an ARM, your interest rate will remain fixed for anywhere from six months to 10 years—though three-, five- and 10-year periods are the most common.

Once your initial fixed period is over, your interest rate can change every six or 12 months, but there are caps on how much the rate can change with each adjustment.

• Initial rate cap: After the initial period, the first adjustment is often capped at a maximum of 2 percentage points, though it can be as much as 5 percentage points.
• Periodic rate cap: Subsequent rate adjustments are typically limited to 2 percentage points per adjustment period.
• Lifetime rate cap: The lifetime cap is typically 5 percentage points or so above the initial interest rate.

When you apply for a mortgage, a lender is required to provide you with a loan estimate that spells out the various costs and features of the loan, including the maximum pay increase you will owe at the first adjustment, how often the rate can be adjusted and the maximum monthly payment you could be charged.

Example

Let's say you take out a 30-year adjustable-rate mortgage for $400,000 with a five-year initial period and a 5% interest rate.

Here's what your monthly payments might look like if the rate were to jump by 1% after the initial period expires and increases by 0.25% each year after that, with a lifetime cap of 10%:

Of course, interest rates are likely to fluctuate differently over time, and in some cases, your rate may go down instead of up. However, this example can give you a look at the potential risks an ARM can pose.

Types of Adjustable-Rate Mortgages

There are several types of ARMs, each of which has a different initial fixed period and adjustment period. The most common options, typically called hybrid ARMs, include:

• 5/1 ARM: The initial rate is fixed for the first five years, after which the rate can be adjusted once a year.
• 7/1 ARM: The initial rate is fixed for the first seven years, after which the rate can be adjusted once a year.
• 10/1 ARM: The initial rate is fixed for 10 years, after which the rate can be adjusted once a year.
• 5/6 ARM: The initial rate is fixed for five years, after which the rate can be adjusted once every six months.
• 7/6 ARM: The initial rate is fixed for seven years, after which the rate can be adjusted once every six months.
• 10/6 ARM: The initial rate is fixed for 10 years, after which the rate can be adjusted once every six months.

Some lenders offer specialized types of ARMs, such as:

• Payment option ARMs: With this type of loan, you can choose how to repay your loan based on your budget. That may include interest-only payments, full principal and interest payments or minimum payments.
• Interest-only ARMs: With this option, you'll pay only the interest that accrues in your loan for a predetermined time period, after which you'll need to make principal and interest payments.

How to Qualify for an Adjustable-Rate Mortgage

Each lender has its own approach to underwriting criteria. In general, however, ARM requirements are similar to the guidelines for FRM loans. Standard guidelines include:

• Credit score: For a conventional ARM, you typically need a score of 620 or above to get approved, but Federal Housing Administration (FHA) ARMs can go as low as 580 or even 500 if you have a 10% down payment. Veterans Affairs (VA) ARMs don't have a minimum score set by the VA, but lenders typically look for a 620 or higher.
• Debt-to-income ratio: You'll typically need a debt-to-income ratio (DTI) of no more than 50%, though the lower it is, the better your chances of approval and a low interest rate.
• Down payment: For a conventional ARM, you'll typically need to put down 5%, though some lenders may offer lower requirements. With an FHA ARM, you can put down as little as 3.5%, and VA ARMs require no down payment at all.

Lenders will also consider your credit history, cash reserves and other factors to determine your eligibility.

Learn more: How Long Does Mortgage Underwriting Take?

Pros and Cons of an Adjustable-Rate Mortgage

There are several benefits to getting an ARM over an FRM, particularly during periods of high interest rates. However, there are also some clear downsides and risks to keep in mind. Here's what you should know.

Should You Get an Adjustable-Rate Mortgage?

It's important to understand your situation, needs and goals to determine whether an ARM is the right fit for you.

Here are some scenarios where it can make sense to choose an ARM:

• You're not planning to stay in the home for longer than the initial fixed-rate period.
• You expect interest rates to go down and plan to refinance when they do.
• Market rates are high, and you want to minimize your costs over the first few years of your loan.
• You need lower payments to meet DTI requirements.
• You're comfortable with the long-term risk of an ARM.
• You have the budget to accommodate higher monthly payments down the road.

On the flip side, here are some situations where it might make sense to think twice about an ARM:

• You plan to stay in the home for a long time.
• You prefer predictable monthly payments.
• Market rates are low, and they're expected to rise over the next few years.
• You're on a tight budget and can't stomach higher mortgage payments.
• You want to avoid refinancing over the next few years.
• You're generally risk-averse.

How to Apply for an Adjustable-Rate Mortgage

An adjustable-rate mortgage is generally available from the same lenders that offer fixed-rate loans, including banks, credit unions and online lenders.

You can get an ARM as a conventional loan or as a government-backed mortgage through FHA and VA programs. Take some time to research all of your options to ensure that you get the best rate you qualify for.

Here are steps you can take to get an ARM:

1. Evaluate your financial situation. Register with Experian to get free access to your Experian credit report and FICO^® Score^☉ to assess your credit health. Then, take a look at your budget to get a sense of how much you can afford to pay each month.
2. Shop around. Plan to get preapproved with at least a few lenders so you can compare interest rates, closing costs and other important terms. This process can be time-consuming, but it can help ensure that you get the best possible offer. It may also help to work with a mortgage broker who works with multiple lenders.
3. Submit an application. Once you choose a lender, follow instructions to complete your application and provide the necessary documentation for a mortgage.
4. Make an offer. Take your time to find the right home for you and make an offer. Once you're under contract, you can start the closing process, which may involve more documentation, your due diligence and further negotiations with the seller.
5. Close on the deal. At the end of the mortgage process, you'll pay your closing costs and down payment and attend the closing meeting, where you'll sign paperwork to finalize the purchase and loan.

Frequently Asked Questions

Improve Your Credit to Score a Lower Rate

An ARM can provide a lower initial interest rate than a fixed-rate mortgage—at least at first. But if your credit isn't in great shape, your rate will still be higher than what you could qualify for with a better credit score.

Check your credit scores to find out where you stand, and get a copy of your credit report to determine which areas you may need to address. If you're not in a hurry, take some time to work on improving your credit before you get preapproved for a mortgage. It can take time to build your credit, but doing so could save you thousands, if not tens of thousands, of dollars over the life of your mortgage loan.