Comparing the Best ARM Loan Rates: Your Complete Guide

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ByChristopher Boston
Edited byVictoria Copans

Updated: October 29, 2023

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Mortgages help homebuyers by allowing them to purchase a house now and pay for it over time. The rate you secure on your mortgage significantly influences the total amount you'll pay for your home, and rates can vary greatly across loan types and structures. For instance, adjustable-rate mortgage (ARM) loans have rates that can change over time, making them distinct from traditional fixed-rate mortgages. Knowing about current ARM loan rates can help you make more informed financial decisions when it comes to securing a mortgage.

Current ARM Loan Rates

Currently, the average ARM loan rate is around 8%, but it isn’t static. Rates fluctuate based on various factors, and a small shift in rates can impact monthly payments and total loan costs. For anyone considering a mortgage or refinance, monitoring these changes is key because it allows you to time your applications based on when the rate works best for you. The rate table below gives a clearer picture of the available rates across various loan types.

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What Are ARM Loans?

An ARM, or adjustable-rate mortgage, is a mortgage type where the interest rate can change over time. Unlike fixed-rate mortgages, whose rates remain constant throughout the loan's life, ARM loans' interest rates adjust based on specific economic conditions. These include market demand, changes set by central banks (like the Federal Reserve), inflation and broader economic trends. These cause ARM rates to fluctuate, affecting monthly payments.

ARM loans have two distinct periods:

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Your ARM rate adjustments are tied to a specific rate index, like the U.S. Treasury Bill rate, combined with a preset margin determined by your lender. As the index rate shifts up or down, your loan's interest rate will adjust accordingly, within established limits.

With this knowledge, you can anticipate and navigate the dynamics of an ARM loan, ensuring you remain in control of your financial commitments.

Types of ARM Loans

There are several different types of ARM loans, each with a distinct set of features that influence the interest rates borrowers receive. Lenders factor in different risk levels and benefits associated with each type, leading to varying rates. Let's break down how these ARM types might influence mortgage rates:

  • Hybrid ARMs: With loans like the 5/1, 7/1 or 10/1, you benefit from fixed interest rates, which are often lower than those of standard fixed-rate mortgages, for an initial period. The first number refers to the period of fixed interest — with a 5/1 loan, for example, the interest remains fixed for the first five years. Once the fixed period ends, your rates become adjustable. The initial lower rates reflect the trade-off you make for accepting future rate variability.

  • Interest-Only ARMs: These loans allow you to pay just the interest for a predetermined period. Since borrowers aren't reducing the principal balance during this time, lenders often charge a slightly higher interest rate to compensate for the increased risk. Lenders see these loans as riskier because borrowers might experience payment shock after the interest-only period and have trouble repaying the loan balance.

  • Payment-Option ARMs: These enable increased flexibility because they offer multiple payment choices, but they can also pose more significant risks, especially if borrowers consistently opt for minimum payments that don't cover accruing interest. As a result, lenders might set higher initial rates to mitigate potential risks.

The type of ARM you choose can affect the mortgage rates you receive because lenders consider the risks they undertake as well as the benefit to borrowers for each type. Understanding these factors better positions you to find the best ARM loan rates tailored to your situation.

WHAT IS PAYMENT SHOCK?

Payment shock refers to the sudden, substantial increase in monthly mortgage payments. ARM borrowers usually experience this when their initial fixed-rate period ends and the adjustable rates kick in. Or, in the case of interest-only ARMs, this can happen when you begin paying for both the interest and the principal.

The payment increase can catch borrowers off guard, leading to budget strains and potential financial challenges. It's crucial to anticipate and prepare for this change so you can manage your finances effectively and ensure you don't default on the loan.

Benefits of Understanding ARM Loan Rates

Keeping up with ARM rates isn’t just a good-to-know — it offers tangible benefits for borrowers:

  • Potential for Lower Initial Rates: ARM loans often start with lower interest rates than fixed-rate mortgages. By understanding current ARM loan rates, you can seize opportunities to lock in these attractive initial rates, leading to immediate savings.

  • Informed Refinancing Decisions: Knowing about ARM loan rates allows homeowners to decide if refinancing their mortgage is beneficial. For example, switching to a fixed-rate mortgage might be a smart move if you’re expecting ARM rates to rise significantly.

  • Budgeting and Planning: You can use insights into potential rate adjustments to budget more effectively. Foreseeing potential increases or decreases in monthly payments allows for better financial planning and minimizes surprises.

Staying up to date with ARM loan rates provides you with a strategic advantage, letting you make choices that best align with personal financial goals.

Factors Affecting ARM Loan Rates

Several factors influence ARM loan interest rates, and knowing about them helps you time your loan decisions strategically, potentially saving thousands over the loan's duration.

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Keeping an eye on these key factors allows you to better anticipate potential ARM loan interest rate changes and position yourself for a favorable loan deal.

How to Secure an ARM Loan

If you're considering an ARM loan, the following sections will walk you through the factors that may influence whether you qualify for one and the steps to apply.

Qualifying for an ARM Loan

Several factors will impact the availability and terms of ARM loans. Here are some of the main ones to keep in mind so you'll be well-prepared when it's time to discuss your options with a lender.

1

Credit Score

Lenders look at your credit history to assess the risk of lending to you. A higher score often means you're more likely to get approved and secure a better ARM loan interest rate.

2

Debt-to-Income Ratio (DTI)

This measures your monthly debt obligations against your income. Lenders prefer a lower DTI because it suggests you have more disposable income, allowing you to afford new debt. A DTI under 43% is a common benchmark for many lenders.

3

Employment History

A stable employment history shows lenders you have a reliable income stream. Typically, two years in the same field or with the same employer can enhance your standing.

4

Down Payment

While down payment requirements can vary, having a sizable amount can improve your chances of approval. It can also affect the terms of the loan. For instance, a 20% down payment might help you avoid private mortgage insurance.

5

Property Use

The type of property you're buying — whether a primary residence, a second home or an investment property — can influence your qualification. Those buying primary residences often receive better terms since lenders view them as less risky.

Getting an idea of what type of loan you might qualify for and what you can potentially improve about your financial profile will set you up for a smoother mortgage journey.

How to Apply for an ARM Loan

Knowing the ins and outs of the ARM loan application process eliminates guesswork and sets you up for a streamlined experience. Here are the steps to prepare for:

1

Research and Choose a Lender

Start your journey by comparing mortgage lenders and their ARM loan offerings. Some might even have exclusive deals, especially for first-time homebuyers.

2

Get Prequalified and Pre-Approved

Initially, get prequalified to receive an estimate of how much you might be able to borrow based on a brief financial overview. You can take it a step further with a pre-approval, which involves a thorough financial background check, including verification of income, credit score and other debts. It provides a more precise indication of the loan amount the lender is willing to offer.

3

Gather Necessary Documentation

Prepare essential documents, such as recent pay stubs, tax returns and other debt details, which will be crucial for the application.

4

Complete the Loan Application

Fill in the lender's official ARM loan application form, providing comprehensive personal and financial data.

5

Undergo Loan Processing and Underwriting

Post-application, the lender confirms all your details and evaluates your credit. An underwriter then assesses the risk of lending to you, determining the loan's approval.

6

Lock in Your Rate

Upon approval, consider "locking in" a specific rate if you're comfortable with the current rate. Locking in the ARM rate ensures that it remains unchanged until you close on the home.

7

Closing the Loan

Sign the necessary paperwork and finalize the loan terms. Typically, the loan amount is directly transferred to the home seller or existing owner.

Being informed about this process will help you know what to expect and facilitate your loan applications, putting you one step closer to your dream home.

How to Get the Best ARM Rates

Securing the most favorable ARM loan rates can make homeownership more affordable and save you a significant amount over the loan's duration. Whether you're a borrower with a not-so-perfect financial profile or one with stellar credentials, seeking the best rates is in your best interest, leading to lower monthly payments and reduced interest over time. That's money in your pocket, regardless of your starting financial position.

Here's how to ensure you're offered the best rates possible:

1

Boost Your Credit Score

A stronger credit score often paves the way for preferable rates. Regularly check your credit report, stay punctual with bill payments and work to reduce your outstanding debt.

2

Increase Your Down Payment and Improve LTV

The Loan-to-Value (LTV) ratio is the loan amount compared to the home's value. A lower LTV is usually seen as less risky for lenders. You can achieve a more favorable LTV by increasing your down payment, which can earn you a better rate.

3

Consider Shorter Loan Terms

ARMs with shorter durations often carry lower initial interest rates. If you're thinking about moving or refinancing in a few years, this could be your best bet.

4

Seek Rate Lock Options

Some lenders offer the chance to lock in a rate for a designated period. Opting for this shields you from possible rate hikes before you can complete the loan process.

5

Limit New Debt Applications

Applying for credit leads to a hard inquiry on your credit report. Too many hard inquiries can cause your score can dip. Try to keep other credit applications to a minimum when you're eyeing a home loan.

Taking proactive steps to improve your financial standing can make a notable difference in the rates you get — even a small percentage point reduction can equate to substantial savings over time.

Frequently Asked Questions

MoneyGeek answered questions commonly asked by aspiring homeowners to provide additional information about ARM loans and how to navigate their rates.

ARM rates often begin lower because the lender assumes less initial risk. Since the rate adjusts later, the uncertainty of future market changes becomes the borrower's responsibility. This structure allows lenders to make the introductory offer more appealing to borrowers.

Typically, after the initial fixed period ends — like five or seven years for a 5/1 or 7/1 ARM, respectively — the rates adjust annually. However, certain loan structures might have semi-annual or even monthly adjustments, making it crucial to understand your loan's terms.

Many borrowers choose to refinance to benefit from the predictability and consistency of fixed rates, especially when long-term market projections show signs of increasing rates. Refinancing can provide more predictability and long-term stability.

Rate caps act as protective barriers, determining the maximum limit on interest rate increases during an adjustment period. It ensures that borrowers don’t face unexpected, drastic hikes, offering some predictability in an ARM's flexible structure.

For first-time buyers expecting to move within a few years or foreseeing higher income, ARMs can be a good option. Understanding the potential adjustments becomes crucial, especially if plans change and you end up staying longer in the home.

Achieving optimal rates requires a blend of factors, including a robust credit score, a substantial down payment and a thorough understanding of your loan's rate caps. It's also key to explore multiple offers from various lenders to find the best fit.

About Christopher Boston


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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.