Adjustable-Rate Mortgage FAQs

What is an ARM?

An ARM is an adjustable-rate mortgage. It’s a type of home loan where the interest rate is not fixed for the entire term of the loan. Instead, an ARM starts with a fixed rate for an initial period and then adjusts at predetermined intervals, typically based on a specific financial index and a margin set by the lender. The initial and adjustment periods can range from 6 months to 10 years. For example, when you see a 7/6 ARM, this means that the interest rate is fixed for the first 7 years and can then adjust up or down based on the loan details every 6 months. ARMs often have initial interest rates that are lower than fixed-rate mortgages. This can make them attractive to buyers in high interest rate environments.

What does it take to qualify for an ARM?

Qualifying for an adjustable-rate mortgage involves similar criteria to that of a fixed-rate mortgage. Lenders assess a buyer’s financial stability, creditworthiness, and capacity to repay the loan. However, there are some important differences to point out depending on the structure of your adjustable-rate mortgage.

Generally, ARMs with initial periods of 6 years or more (for example, a 7/6 or 10/6 ARM) allow the borrower to qualify at the note rate. The note rate refers to the fixed interest rate that is set for the initial period of the loan.

For ARMs with an initial period of 5 years or less (for example, a 1/6 or 5/6 ARM), the borrower would typically need to qualify at a rate that’s 2% higher than the note rate. This is because ARMs with shorter fixed-rate periods can expose the borrower to more interest rate fluctuations, and lenders want to ensure that borrowers can handle potential increases in their monthly mortgage payments.

What happens at the end of the ARM term?

After the initial rate period expires, the interest rate on the loan will be recalculated based on the current financial index and the margin specified in the loan agreement. This can result in an increase, decrease, or no change in the interest rate. Most ARM loans have limits as to how much the rate can go up or down in an adjustment period, as well as limits on the overall amount the rate can adjust throughout the life of the loan. It’s very important to understand this aspect of an ARM loan.

When rates go down, can I refinance an ARM into a fixed-rate mortgage?

Yes. ARMs don’t have prepayment penalties, so a buyer can pay off the loan at any time or refinance at any time. This makes ARMs very versatile and attractive for borrowers.

What makes an ARM beneficial for me as a buyer?

Many buyers choose ARMs because of the lower initial interest rate, which means lower payments for the initial portion of the loan. And again, the loan is able to be refinanced if the borrower sees an opportunity to take advantage of lower rates in the market.

What should I look for in the details of an ARM?

The 4 biggest things to look for as a borrower are:

1. The qualifying rate for the borrower to obtain the loan.
2. The initial rate period before the first adjustment.
3. The index and margin that will be used determine the next rate and payment.
4. The limits of what the rate can adjust to in the adjustment period, as well as over the life of the loan.

Are ARMs popular in the market today?

ARMs are popular with borrowers who are looking to find affordable payments for their homes in a rising interest rate environment. Recent increases to fixed-rate mortgages have caused ARMS to have resurgent popularity.

I’ve heard that ARMs are not the best way to go. Is this true?

There are misconceptions and misunderstandings about ARM loan products. If you can benefit from a lower qualifying rate and the initial period extends beyond your likely ownership of the home—or if there is potential for an improving personal financial situation (like raises or promotions over several years)—ARMS are fantastic way to match your financing to your needs with greater flexibility. Additionally, taking an ARM when rates are higher presents the opportunity that your rate could adjust down in the future, which would lower your payment.

Where can I go to get more information about ARMs and other loan options?

Use our mortgage calculators, reach out to a Meritage Homes Sales Counselor in the community you’re interested in, or connect with an MTH Mortgage¹ Loan Consultant by calling 877-388-5362.