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When mortgage interest rates are high, borrowers often choose adjustable rate mortgages to save money. To see current interest rate trends, check out today's adjustable rate mortgage rates.
What are your current ARM rates?
According to data from Zillow, 7/1 ARM and 5/1 ARM interest rates averaged 6.99% and 6.88%, respectively, in May. These rates are roughly the same as the previous month. Since the start of June, ARM interest rates have trended slightly lower.
Last month, ARM rates were a bit higher than 30-year fixed mortgage rates, which averaged 6.76%, meaning that with an ARM you might not be getting a discount right now compared to a fixed-rate loan, though this depends on the term of the ARM and what index its rate is tied to.
Another common term for an ARM is the 10-year ARM, which is often available as a 10/1 or 10/6 ARM. Of the most popular types of ARMs, the 10-year ARM offers a longer fixed-rate period and typically has a slightly higher interest rate than shorter terms.
Mortgage rates remain high because high inflation has discouraged the Federal Reserve from cutting the federal funds rate, affecting the cost of all borrowing for consumers. If inflation slowed and the labor market cooled, mortgage rates should start to fall.
Compare ARM rates today
See how the latest ARM rates compare to other types of mortgages.
Mortgage Type Today's Average Interest Rates
This information is provided by Zillow. See more mortgage rates on Zillow Zillow Real Estate
Fixed rate mortgages vs adjustable rate mortgages
ARM interest rates are typically lower than the average 30-year fixed mortgage rate, depending on the type of ARM.
However, right now, ARM rates aren't significantly lower than 30-year fixed rates. In some cases, they may even be higher. If mortgage rates fall across the board in the coming months and years, ARMs could get even better discounts. But for now, you're likely better off getting a fixed-rate loan.
How ARM works
The term “ARM” refers to an adjustable rate mortgage. When taking out a mortgage, you have to decide whether you want a fixed or adjustable rate.
A fixed-rate mortgage has the same interest rate for the life of the loan, which means your monthly payments will remain the same, except for adjustments for taxes and insurance.
Initial fixation period and subsequent adjustments
An adjustable rate mortgage starts out with a fixed interest rate for a set period of time, and once this fixed period ends, your interest rate adjusts periodically according to an index that is linked to it.
For example, with a 7/1 ARM, you pay the same interest rate for the first seven years and your interest rate adjusts annually after that, while with a 5/6 ARM, your interest rate will be fixed for the first five years and then adjust every six months after that.
cap
ARMs usually have interest rate caps that limit how much your interest rate can change with each interest rate adjustment and how much it can increase over the life of your loan. Your mortgage lender will tell you how much your monthly payment will increase with each interest rate adjustment, as well as the maximum amount you will end up paying.
Benefits of variable rate mortgages
Initial interest rates may be lower
If the interest rate on an adjustable-rate mortgage is significantly lower than that of a fixed-rate mortgage, your monthly payments will be lower, leaving more money in your budget for other things, like saving for retirement.
You may be able to save money if interest rates fall in the future
If interest rates drop after the initial fixed period, your monthly payments will be lower. With a fixed-rate mortgage, you'll need to refinance to take advantage of a lower interest rate.
The risks of variable rate mortgages
Unpredictable payments
While ARMs can help you save money, they come with the risk that if interest rates adjust and your mortgage payments eventually increase, you'll have less money to spend each month.
You may not be able to get out of your loan before the interest rate adjusts.
Many borrowers acquire ARMs with the intent of selling or refinancing before the fixed-rate period ends, but there's no guarantee they'll be able to do either.
Mason Whitehead, Dallas branch manager at Churchill Mortgage, experienced firsthand what this can mean when he was stuck on a five-year ARM.
“We knew we'd be OK selling in three or four years, so we did,” Whitehead says, “but markets are unpredictable and the housing bubble burst in 2008 meant we still held onto the property 10 years later and weren't able to sell. That said, it's important to be prepared for the worst-case scenario and have the financial capacity to handle increased payments, because the worst-case scenario could come true when you least expect it.”
Complex Terminology
There are many different types of ARMs, and how they work is not as simple as a fixed-rate mortgage, so if you are going with an ARM, it's important to fully understand how they work, what index they are based on, how often they adjust, and how much your monthly payments will increase over time.
Is ARM a good idea in 2024?
ARMs are generally a good idea only if you are confident that interest rates will fall around the time your interest rate adjusts or if you can sell or refinance before rates drop.
Most major forecasts expect mortgage rates to trend downward over the next few years. However, mortgage rates are often unpredictable and can be affected by a variety of factors, including the economy, the Federal Reserve, and even natural disasters, geopolitical tensions, or, as we saw in 2020, a pandemic.
If you're considering an ARM, you want to prepare for the worst-case scenario and make sure you'll be able to comfortably pay your mortgage even with the increased monthly payments.
“Borrowers should consider their financial situation and ability to absorb potential interest rate increases before getting an ARM,” says Mike Rhoads, owner of real estate investment firm Rhoads Home Buyers. “They should also be aware of the terms and features of the ARM, such as the index it's tied to, the margin and any interest rate adjustment caps.”
Mortgage Calculator
Use Insider's free mortgage calculator to see how much difference a lower interest rate could make to your monthly mortgage payment.
Mortgage Calculator
$1,161 Estimated Monthly Payment
Paying a 25% higher down payment would save you $8,916.08 in interest. Lowering your interest rate by 1% would save you $51,562.03. Paying an extra $500 per month would shorten the term of your loan by 146 months.
ARM FAQs
ARM interest rates can fluctuate significantly from day to day and even hour to hour. Last month, the average 5/1 ARM interest rate was 6.88%.
Generally, ARM interest rates have not been significantly lower than fixed rates in recent months, so an ARM may not be worth it right now.
The main drawback to getting an ARM is that you run the risk of your monthly payments increasing when your interest rate adjusts.
Yes, it is possible to refinance from an ARM to a fixed-rate mortgage, and many borrowers do this to take advantage of the lower initial interest rate on an ARM and to lock in their interest rate before the ARM adjusts.
It depends on how much interest rates rise and what the terms of your loan are. Your lender can tell you how much your final payment could increase, based on the interest rate cap.
If you plan on selling or refinancing before your ARM adjusts, you may want to prioritize the ARM if it offers a lower interest rate compared to your current fixed mortgage rate.
Molly Grace
Mortgage Reporter
Elias Shaya
Compliance Associate
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