CBS News
What is an adjustable-rate mortgage (ARM)?
Getty Images/iStockphoto
If you’re on the hunt for a new home, today’s high mortgage rates may be a cause for concern. After all, the higher your mortgage rate is, the higher your monthly payments will be. And, even a small difference in your rate could make a significant difference in the total amount of money you pay for your home in the long run.
The good news is that you may not have to deal with a high interest rate for the life of your mortgage. An adjustable-rate mortgage (ARM) could allow you to purchase your home at a lower rate now and let you take advantage of potential interest rate reductions in the future.
Find out your mortgage loan options online now.
What is an ARM loan?
An ARM loan differs from a fixed-rate mortgage loan in terms of the interest rate. A fixed-rate mortgage has an interest rate that stays the same over the life of the loan while an adjustable-rate mortgage has a variable interest rate that can change over time.
What’s unique about ARM loans is that they start with a period of fixed interest. That is followed by an adjustable-rate term in which the rate can change at certain times. Depending on the ARM loan you choose, the fixed-rate period will generally last from a year or two to 10 years. During that time, you’ll pay the fixed interest rate you agreed to when you purchased your home.
Once the fixed-rate period ends, the ARM loan enters an adjustable-rate phase, which lasts for the remainder of the loan. During the adjustable period of the loan, the lender can adjust your mortgage rate based on the wider rate environment. While it depends on the loan, the rate can typically be adjusted every six to 12 months on average.
For example, a 5/6 adjustable-rate mortgage is one with a five-year fixed-rate period followed by an adjustable rate that can change every six months. Or, a 7/1 ARM would have a fixed rate for seven years followed by an adjustable rate phase in which the rate can change once per year.
Compare your mortgage options today.
What is an ARM rate cap?
ARM loans typically also have rate caps tied to the adjustable-rate phase of the loan. These caps limit the increase or decrease that can be made to your rate.
For example, a 5/6 ARM loan with 2/2/5 caps:
- Has a five-year fixed period and the adjustment period allows for rate changes every six months
- Can be adjusted by a maximum of 2% for the first adjustment
- Can be adjusted by a maximum of 2% for the second adjustment
- Can be adjusted by 5% maximum in total over the life of the loan
For example, let’s say you borrow money with a 5/1 (2/2/5) ARM loan at a 6.5% fixed initial rate. In this case, your rate would stay at 6.5% for the first five years.
When the fixed period ends in year six, your interest rate could adjust in either direction by a maximum of two percentage points, increasing to a maximum of 8.5% or dropping to a maximum of 4.5% depending on market conditions. The following year, a similar rate change with a two percentage point maximum could occur.
But while the rate can adjust each year, the adjustment can never be more than 5% above or below the rate the mortgage started with. In this case, the 5% cap would mean the mortgage rate could range from 1.5% to 11.5% at any point during the adjustment period.
Benefits of choosing ARM loan over a fixed-rate mortgage
“In this economic climate, it’s important for buyers to explore all their mortgage options,” says Bill Banfield, EVP of capital markets for Rocket Mortgage. “There are a few reasons buyers are considering adjustable-rate mortgages (ARMs).”
These include:
- Lower initial fixed rates: “Typically, ARMs offer lower interest rates during a fixed period at the beginning of the loan term, say the first seven years, then the rate adjusts each year for the rest of the term,” says Banfield. So, you could start saving money immediately upon closing with an ARM.
- Variable rates: ARMs “can also be a good option if the buyer is confident mortgage rates will fall in the future,” Banfield says. And, an adjustable-rate loan may benefit you now because experts expect rates to fall soon.
- Lower initial monthly payments: Your ARM will likely come with a lower initial rate than a fixed-rate mortgage, so you’ll also likely have lower initial monthly payments than you would with a fixed-rate option.
- Qualification: It may be easier to qualify for an ARM than it is to qualify for a fixed-rate mortgage in certain cases.
Explore your options and learn whether an adjustable-rate mortgage loan is right for you.
The bottom line
If you’re concerned about today’s interest rates impacting your ability to buy a home, an ARM loan may be a compelling option to consider. And, experts expect that rates could decline in the future, so an ARM could allow you to take advantage of potential rate declines when they happen.
CBS News
Pedro Pascal, Joseph Quinn, and Fred Hechinger on stepping into the world of “Gladiator II”
Watch CBS News
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.
CBS News
Nancy Mace seeks to bar transgender women from using female bathrooms on Capitol Hill after first trans member elected to House
Washington — Republican Rep. Nancy Mace of South Carolina introduced legislation Monday to change House rules to prohibit transgender women from using women’s bathrooms and other facilities on Capitol Hill, a proposal that comes just before the House prepares to swear-in the first openly transgender member of Congress.
Mace’s two-page resolution would bar House members, officers and employees from using single-sex facilities in the Capitol or House office buildings that do not correspond with their biological sex. Her proposal claims that allowing biological males into women’s restrooms, locker rooms and changing rooms “jeopardizes the safety and dignity” of female lawmakers, officers and Capitol Hill employees.
The House sergeant-at-arms would be tasked with enforcing the measure, if approved.
The South Carolina Republican’s legislation appears to target Rep.-elect Sarah McBride of Delaware, who became the first openly transgender person elected to Congress when she won the race for the state’s only House seat two weeks ago.
McBride called Mace’s resolution a “blatant attempt from far right-wing extremists to distract from the fact that they have no real solutions to what Americans are facing. We should be focused on bringing down the cost of housing, health care, and child care, not manufacturing culture wars.”
“Every day Americans go to work with people who have life journeys different than their own and engage with them respectfully, I hope members of Congress can muster that same kindness,” she wrote on social media.
But Mace attacked the “radical left” and claimed they are “trying to erase women.”
“Sarah McBride doesn’t get a say in this,” she said. “This is a biological man trying to force himself into women’s spaces, and I’m not going to tolerate.”
CBS News
Hakeem Jeffries elected House Democratic leader as GOP is set to retain control of lower chamber
Washington — House Minority Leader Hakeem Jeffries was elected Tuesday to lead Democrats for another two years in the minority despite the party failing to flip control of the lower chamber in the 2024 election.
Democrats are holding their leadership elections on Tuesday as the party seeks to keep its leadership intact as it reels from the bruising losses in the 2024 elections.
Democratic caucus chair Rep. Pete Aguilar of California was reelected Tuesday morning, and House Minority Whip Katherine Clark of Massachusetts is also expected to continue in her role in the 119th Congress, beginning in January.
Still, one race was injected with some uncertainty, as Rep. Jasmine Crockett of Texas launched an eleventh-hour challenge against Rep. Debbie Dingell of Michigan for chair of Democratic Policy and Communications Committee. Dingell was still viewed as the favorite heading into Tuesday’s elections.
Jeffries made history in 2023 when he became the first Black lawmaker to lead a party in Congress, succeeding former House Speaker Nancy Pelosi as the top Democrat in the lower chamber. He was set to again make history as the first Black speaker had Democrats gained control of the House.
Kevin Dietsch/Getty Images
Heading into Election Day, Democrats needed a net gain of four seats to win the majority. Though Democrats won more than a handful of Republican-held seats in this month’s election, they lost just as many. The party also suffered the loss of the Senate and the White House. As House Democrats conduct the leadership elections Tuesday, they’re still reeling from the results — and reckoning with the path forward.
Republicans are expected to have a narrow majority in the next Congress. President-elect Donald Trump’s selection of several House members to serve in his administration will also temporarily squeeze the majority even further until those seats are filled in special elections.
Jeffries, in an interview with NPR last week, said the narrow margins and divisions among House Republicans have effectively made Democrats the majority in several instances.
“Democrats, because of the closeness of the margins, have effectively governed in the majority, though we are in the minority. And the same dynamic will exist as we move forward,” Jeffries said, pointing to a number of votes to avoid government shutdowns over the past two years in which Democrats provided a majority of the votes.
House Speaker Mike Johnson, a Louisiana Republican, said last week that he has “begged and pleaded” with Trump to stop poaching House members for his administration.
Republicans held their leadership elections last week, backing Johnson for another term as speaker. Johnson expressed confidence that he will win the speakership in the first round of voting on the House floor in January.
Pedro Pascal, Joseph Quinn, and Fred Hechinger on stepping into the world of “Gladiator II”
Northfield residents worry about tax increases, project costs
Nancy Mace seeks to bar transgender women from using female bathrooms on Capitol Hill after first trans member elected to House
Pedro Pascal, Joseph Quinn, and Fred Hechinger on stepping into the world of “Gladiator II”
Northfield residents worry about tax increases, project costs