How Does a 3-year ARM Loan Work?

Some three year loans have a higher initial adjustment cap, allowing the lender to raise the rate more for the first adjustment than at subsequent adjustments. It’s important to know whether the loans you are considering have a higher initial adjustment cap. Lenders nationwide provide weekday mortgage rates to our comprehensive national survey to bring you the most current rates available.

What are today’s ARM rates?

Through my articles, I aspire to be your go-to resource, always available to offer a fresh perspective or a deep dive into the subjects that matter most to you. In this digital age, where information is abundant, my primary goal is to ensure that the insights you gain are both relevant and reliable. Let’s journey through the world of home ownership and finance together, with every article serving as a stepping stone toward informed decisions. Still, that low rate equates to lower mortgage payments for the first three to 10 years of your mortgage loan. And with fixed rates on the rise, many borrowers can benefit from the low intro payments on an ARM.

1 vs 10/1 ARM rates

But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment. An adjustable-rate mortgage is a type of home loan with an interest rate that can change over the life of the loan. Sean Briscoe, Director of Products and Payments at Alliant Credit Union, says the variety of ways you can use a personal loan is a major benefit — especially when you’re facing a cash-only expense. It can be confusing to understand the different numbers detailed in your ARM paperwork. To make it a little easier, we’ve laid out an example that explains what each number means and how it could affect your rate, assuming you’re offered a 5/1 ARM with 2/2/5 caps at a 5% initial rate. Because ARM rates can potentially increase over time, it often only makes sense to get an ARM loan if you need a short-term way to free up monthly cash flow and you understand the pros and cons.

Can you refinance an ARM loan?

Kim Porter is an expert on credit, mortgages, student loans, and debt management. Yes, if your ARM loan comes with a “conversion option.” Lenders may offer this choice with conditions and potentially an extra cost, allowing you to convert your ARM loan to a fixed-rate loan. An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

Adjustable-rate mortgage example

3-year ARM interest rates are based on the SOFR (Secured Overnight Financing Rate), so they change every day. For today, Monday, January 06, 2025, the national average 5/1 ARM interest rate is 6.53%, flat compared to last week’s of 6.53%. The national average 5/1 ARM refinance interest rate is 6.41%, down compared to last week’s of 6.42%. Knowing what type of mortgage you’re getting can be a challenge, since so many things that sound like a good idea are often the things that can cost you the most money.

Why choose a 7-year ARM?

Bankrate has helped people make smarter financial decisions for 40+ years. Our mortgage rate tables allow users to easily compare offers from trusted lenders and get personalized quotes in under 2 minutes. While our priority is editorial integrity, these pages may contain references to products from our partners. Your payments may fluctuate every 6 months based on the current loan balance, new interest rate, and remaining loan term. However, if you’re going to stay in your home for decades, an ARM can be risky. If you don’t refinance, your mortgage payments may rise significantly once the fixed-rate period ends.

I’m a first-time homebuyer. Should I get an ARM?

These limit how much your lender can change your interest rate, usually both at each adjustment interval and over the life of your loan. Adjust the graph below to see 3-year ARM rate trends tailored to your loan program, credit score, down payment and location. After the fixed-rate period, the lender adds the SOFR index to the 3% margin to get the new interest rate. Let’s say you took out a 30-year 5/1 ARM for $350,000 with an introductory rate of 6.65 percent (the average rate as of this writing). Here’s how your payment schedule might look, assuming interest rates rose annually by. If your mortgage loan has a floor of three percentage points, your interest rate will never drop below 3%, even if its fully-indexed rate is lower.

National mortgage rates by loan type

The interest on your loan will be whatever the index rate is, plus a margin the lender adds. To make sure you can repay the loan, some ARM programs require that you qualify at the maximum possible interest rate based on the terms of your ARM loan. An ARM payment increase could stretch your budget thin, especially if your income has dropped or you’ve taken on other debt.

Can you refinance an ARM to a fixed-rate loan?

• Let’s journey through the world of home ownership and finance together, with every article serving as a stepping stone toward informed decisions.
• When your ARM adjusts to a higher rate, your monthly payment increases.
• But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment.
• It’s something to keep in mind as you check your finances before deciding on a mortgage.
• Its rate will never increase or decrease, which also means your mortgage payment will never change.

Further variations include FHA ARMs and VA ARMs, which are basically the government-backed versions of a conventional ARM, with their own set of qualifications. These are ARMs that allow you to convert your balance to a fixed rate, usually for a fee. In general, each type of loan has a different repayment and risk profile. The following graph is for a 5/1 ARM, but it does a good job of showing how payments can change over time.

APR and ARM calculations

The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence.

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Oftentimes, lenders check your ARM eligibility based on the loan’s fully-indexed rate, which is the highest it could go after adjusting. This protects you as a borrower because it helps ensure you can afford your payments if the rate increases later on. But it also means you don’t get the benefit of qualifying at the ultra-low intro rate. Lenders typically use the fully-indexed rate to qualify you for an ARM loan, rather than the lower intro rate. This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires. In this way, an adjustable-rate mortgage works differently than one with a fixed interest rate.

• ARMs come with rate caps that insulate you from possible steep year-to-year increases in monthly payments.
• But some ARM loans reset every six months or only once every five years.
• These limit how much your lender can change your interest rate, usually both at each adjustment interval and over the life of your loan.
• Apply with a few mortgage lenders and see who offers the lowest rate for that type.
• A payment-option ARM, however, could result in negative amortization, meaning the balance of your loan increases because you aren’t paying enough to cover interest.
• If you can’t afford that payment, then an ARM may not be a good choice for you.
• And with fixed rates on the rise, many borrowers can benefit from the low intro payments on an ARM.
• After that fixed-rate period, your lender will adjust your interest rate on a scheduled basis for the remainder of your 30-year loan term.

• At each rate adjustment, the lender will add your margin to your index rate to get your new mortgage rate.
• One of the most common rate cap structures is the 2/2/5 cap structure.
• ARM start rates are frequently lower than those of a fixed-rate loan.
• Especially if you expect interest rates to drop in the next three years, you may want to refinance with a conventional fixed-rate loan.
• There are several moving parts to an adjustable-rate mortgage, which make calculating what your ARM rate will be down the road a little tricky.

Homebuyers typically choose ARMs to save money temporarily since the initial rates are usually lower than the rates on current fixed-rate mortgages. A 3-Year ARM mortgage is a type of home loan where the interest rate remains fixed for the initial three years. Following this fixed period, the rate adjusts periodically, typically annually, based on prevailing market conditions and an index specified in the loan terms. These adjustments can lead to fluctuations in monthly mortgage payments, making it crucial for borrowers to comprehend the workings of ARM rates. In analyzing different 3-year mortgages, you might wonder which index is better. In truth, there are no good or bad indexes, and when compared at macro levels, there aren’t huge differences.

The following table compares ARM rates to rates on other types of loans. The main risk with an ARM is that the rate will increase along with your monthly payments. The lender repeats the steps to adjust the interest rate and calculate the monthly payment every six months. A payment-option ARM, however, could result in negative amortization, meaning the balance of your loan increases because you aren’t paying enough to cover interest. If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments. The easiest way to shop for an ARM loan is to choose one with a start rate period that comes close to the time in which you expect to own the home or have the loan.

You take out a home loan with a fixed interest rate, and you make a monthly mortgage payment to your lender. Eligible military borrowers have extra protection in the form of a cap on yearly rate increases of 1 percentage point for any VA ARM product that adjusts in less than five years. Before the 2008 housing crash, lenders offered payment option ARMs, giving borrowers several options for how they pay their loans.

• The interest rate on any ARM is tied to an index rate, often the Secured Overnight Financing Rate (SOFR).
• However, some borrowers who had 3/1 ARMs in the past may still be paying them off.
• The 10/1 ARM gives you a low fixed rate for a decade and 20 potential rate adjustments, while a 5/1 ARM only locks your interest rate for five years and has 25 potential rate adjustments.
• The first adjustment is capped at 5%, limiting the increase in the interest rate and reducing the risk of payment shock.
• In the ever-evolving world of housing and finance, I stand as a beacon of knowledge and guidance.
• This protects you as a borrower because it helps ensure you can afford your payments if the rate increases later on.
• With some I-O mortgages the interest rate is adjusting during the initial I-O period, which gives a potential for negative amortization.

Just three years later in 2019, rates rose over a full percentage point to 4.18%. Then, go over your budget and figure out if you can afford to pay the mortgage at its peak rate. If you can’t afford that payment, then an ARM may not be a good choice for you.

Though 3-year loans are all lumped together under the term “three year loan” or “3/1 ARM” there are, in truth, more than one type of loan under this heading. Understanding which of these types are available could save your wallet some grief in the future. Some types of 3-year mortgages have the potential for negative amortization. This table does not include all companies or all available products. The 7-year ARM rate can increase by up to 5% at the first adjustment and up to 1% at subsequent adjustments.

What is an interest-only 3-year ARM?

But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. I’ve been writing and editing stories in the personal finance sphere for two decades, for publications like Business Week and Investopedia, covering 3 year arm rates everything from entrepreneurs to taxes. When compared to other types of mortgages, ARMs typically have stricter requirements. That’s because lenders need to consider your ability to repay the loan if your rate moves higher. If you found this guide helpful you may want to consider reading our comprehensive guide to adjustable-rate mortgages.

• But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment.
• If you’re afraid that you’ll get stuck with a high interest rate beginning with the 37th month of your loan term, you can try to refinance for a fixed-rate mortgage.
• The interest on your loan will be whatever the index rate is, plus a margin the lender adds.
• It’s something to keep in mind as you check your finances before deciding on a mortgage.
• Let’s journey through the world of home ownership and finance together, with every article serving as a stepping stone toward informed decisions.
• Only when you’ve determined you can live with all these factors should you be comparing initial rates.
• Bankrate.com is an independent, advertising-supported publisher and comparison service.
• If your margin is 2 percentage points and the SOFR is 0.15%, then your interest rate would be 2.15%.

The FHFA also publishes a Monthly Interest Rate Survey (MIRS) which is used as an index by many lenders to reset interest rates. The mortgage interest deduction is just one tax break that homeowners can qualify for. Some states let homeowners claim a double deduction, meaning that they can claim the mortgage interest deduction when they file both their state and federal income tax returns. Generally, if you want to take advantage of the tax write-off, you’ll have to itemize your deductions.

Apply with a few mortgage lenders and see who offers the lowest rate for that type. The intro rate on a 3/1 ARM should be lower than the rate on a 5/1 ARM due to its shorter introductory period. If you’re buying a house, keep in mind that you might have to pay a real estate title transfer tax in addition to property taxes. If you decide to sell your home later on, doing so could increase your tax bill.

You may also want to consider applying the extra savings to your principal to build equity faster, with the idea that you’ll net more when you sell your home. An adjustable-rate mortgage is a home loan that features an interest rate that changes over time. Most lenders offer ARMs with initial rates that are fixed for three, five or seven years. Because rates and monthly payments will increase after the fixed-rate period, 3-year ARMs are best for homeowners who plan to either sell or refinance their home within the first three years. Lenders nationwide provide weekday mortgage rates to our comprehensive national survey. Here you can see the latest marketplace average rates for a wide variety of purchase loans.

Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over. If you’re afraid that you’ll get stuck with a high interest rate beginning with the 37th month of your loan term, you can try to refinance for a fixed-rate mortgage. But if rates are falling and your credit score is excellent, refinancing might be worth it to save you money in the long term.

Your specific interest rate will depend on several different factors, from your lender to your credit score to your down payment. Once that three-year period is up, your rate adjusts on an annual basis. The lender can adjust it up or down based on the performance of the index tied to your mortgage, plus a margin set by the lender. The interest rate is fixed for three years, then adjusts annually for the following 27 years. The offers that appear on this site are from companies that compensate us.

Your “margin” is the amount that’s added to the index rate to determine your actual rate. For instance, if the SOFR rate is 2.0% and your margin is 2.5%, your ARM interest rate would be 4.5 percent. At each rate adjustment, the lender will add your margin to your index rate to get your new mortgage rate.