The interest rate of an adjustable-rate mortgage, or ARM, can rise or fall during its term. That’s the main difference between ARMs and standard 15-year or 30-year fixed-rate mortgages.
ARMs start out with a fixed period
During this period, an ARM’s interest rate will remain fixed, meaning that it won’t rise or fall. This fixed period usually lasts from five to 10 years.
After the fixed period ends, ARMs enter their adjustable phase
The adjustable phase is when the interest rate can rise or fall, usually once each year, depending on the performance of whatever economic index the ARM is tied to. Most times, an ARM’s interest rate will rise once its fixed period ends.
Why choose an ARM?
Homebuyers choose ARMs because the interest rate they’ll get is usually lower during the fixed period than the rate they would get with a standard fixed-rate loan. This means that homeowners will benefit from lower mortgage payments during this fixed period.
The risk comes during an ARM’s adjustable period. Say you take out an ARM with a 30-year term, of which the rate for the first five years is fixed. You’d benefit from a lower interest rate during the first five years of your loan.
During the last 25 years of your loan’s term, though, your rate will adjust, rising or falling, usually once each year. During this adjustment period, your monthly payment will also change, rising or falling in tandem with your interest rate.
Adjustable-rate mortgages do include built-in protections limiting how much your interest rate can change during the initial switch from the fixed to the adjustable period. These same protections determine how much the interest rate can rise during each adjustment and how much it can rise in total during the life of your loan.
Does an ARM make sense for you?
ARMs become more popular when mortgage interest rates are higher. That’s because they come with lower rates during the initial fixed period. Many homebuyers still consider mortgage interest rates high, especially when comparing them with the average rates in the recent past.
Do you want a below-market interest rate for at least part of your mortgage? If so, now is still a good time to take out an ARM.
Just make sure you understand how ARMs work
No matter how low that initial interest rate is, it is only temporary. When taking out an ARM, you are betting that mortgage interest rates will be lower in the future and that when your loan’s rate first adjusts, it will still be lower than what average mortgage interest rates are today.
Is that a safe bet? No one knows. No one can predict whether mortgage interest rates will be lower five or seven years from today. But if you are comfortable making that assumption, and if you can afford the higher mortgage payments that will come if your interest rate rises after the adjustable period ends, applying for an ARM could be a smart move.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
© 2025
