Pros, Cons, and How They Work

An adjustable rate mortgage (ARM) is a flexible alternative to a traditional fixed-rate loan. While fixed rates stay the same for the life of the loan, ARM rates can change at scheduled intervals—typically starting lower than fixed rates, which can be appealing to certain homebuyers. In this article, we’ll explain how ARMs work, highlight their potential benefits, and help you determine whether an ARM could be a good fit for your financial goals and timeline.

What Is an Adjustable Rate Mortgage (ARM)?

An adjustable rate mortgage (ARM) is a home loan with an interest rate that can change over time based on market conditions. It begins with a fixed-rate period, typically three, five, seven, or ten years, followed by scheduled rate adjustments.

The introductory rate is often lower than a comparable fixed-rate mortgage, making ARM mortgage rates attractive to buyers who plan to move or refinance before the adjustment period begins.

After the fixed term, the rate adjusts—usually every six months or annually—based on a benchmark index plus a margin set by the lender. If interest rates go down, your monthly payment may decrease; if rates rise, your payment could increase. Most ARMs have 30-year terms, and borrowers may choose to continue payments, refinance, or sell during the life of the loan.

ARMs are typically labeled with two numbers, such as 5/6 or 7/1:

  • The first number represents the number of years the rate stays fixed.
  • The second number shows how often the rate adjusts after the fixed period, either every six months (6) or every year (1).

For example, a 5/6 ARM has a fixed rate for five years, then adjusts every six months. A 7/1 ARM stays fixed for seven years, then adjusts annually.

Difference Between ARMs and Fixed Rate Mortgages

The biggest difference between a fixed-rate mortgage and an adjustable rate mortgage (ARM) is how the interest rate behaves over time. With a fixed-rate mortgage, the interest rate and monthly payment stay the same for the life of the loan, regardless of how market interest rates change. By contrast, ARM mortgage rates are variable. After the initial fixed-rate period, your interest rate can adjust periodically, increasing or decreasing depending on market conditions.

 

 

 

Benefits of an ARM

One of the key benefits of an adjustable rate mortgage is the lower introductory interest rate compared to a fixed-rate loan. This means your monthly payments start off lower, which can free up cash flow during the early years of the loan for other goals such as saving, investing, or home improvements.

A lower interest rate early on also means more of your payment goes toward the loan’s principal, helping you build equity faster, especially if you make extra payments. Many ARMs allow prepayment without penalty, giving you the option to reduce your balance sooner or pay off the loan entirely if you plan to refinance or move before the adjustable period begins.

Is an ARM Right for You?

For the right borrower, an ARM can offer significant advantages, especially when the timing and strategy align. Here are a few scenarios where an ARM mortgage rate might make sense:

1 | First-time buyers planning to move in a few years.

If you're buying a starter home and expect to move within five to ten years, an ARM can be a cost-effective option. You’ll benefit from a lower introductory rate and potentially sell the home before the adjustable period begins, avoiding future rate increases altogether.

2 | Buyers expecting increased income in the future.

If your income is expected to rise, whether through career advancement, bonuses, or a forecasted income, an ARM may be a smart choice. The lower monthly payments during the fixed period can help you stay within budget, and if you choose to pay off the loan early, you may do so before rates adjust.

3 | Borrowers planning to refinance later.

If you anticipate refinancing before the end of the fixed-rate period, an ARM can offer short-term savings. For example, if interest rates stay favorable, or your credit improves, you may be able to refinance into another ARM or a fixed-rate mortgage before your rate changes.

4 | Buyers looking for more options within their budget.

Since most buyers shop based on what they can afford monthly, not the total home price, the lower initial rate on an ARM can stretch your buying power. Even a one-point difference in interest rate could reduce your monthly payment by several hundred dollars.

When an ARM May Not Be the Right Fit

While adjustable rate mortgages offer flexibility and lower initial rates, they’re not ideal for everyone. Here are a few situations where a fixed-rate mortgage might be a better option:

  • You plan to stay long-term. If you expect to stay put for more than 10 years, the stability of a fixed-rate loan may offer more peace of mind.
  • You’re uncertain about your future income. If your budget may not accommodate potential rate increases down the road, a consistent monthly payment could be a safer choice.
  • You prefer predictable payments. Since ARM rates adjust based on market conditions, your monthly payment could change over time.

If long-term stability is your priority, a fixed-rate mortgage can help you lock in your rate and plan confidently for the future.

Explore ARM Options with HFCU

At Heritage Family Credit Union, we offer adjustable rate mortgages designed to provide flexibility and long-term value. Whether you're looking to purchase or refinance a primary residence, second home, or investment property, our ARMs can help you take advantage of favorable market conditions.

Our ARMs are structured with borrower-friendly terms—your rate won’t increase more than 2% annually and won’t rise more than 6% over the life of the loan. This allows you to plan with more confidence while benefiting from lower initial rates and the potential for savings if interest rates hold steady or decrease.

Not sure if an ARM is right for you? We're here to help. Contact HFCU today to speak with a lending specialist and explore the right mortgage option for your needs.