2022 ARM Rates: How They Work

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Adjustable-rate mortgages (ARMs) may save you money for a temporary period on your mortgage payment and may be a good choice — as long as you know how they work.


ARM is short for adjustable-rate mortgage

You’ll typically have an initial rate lower than current 30-year fixed-rate mortgages

The initial rate is usually fixed for a set time ranging between one month and 10 years

After the initial fixed-rate period expires, the rate adjusts based on a margin and index

There is a set time period for rate adjustments — annually being the most common

There is a cap on how much the rate can increase over time

Top ARM lenders

Lender nameARM types offeredWhere they lend
PenFed3-, 5-, 7-, 10- and 15-year ARMsAll 50 states
Lower Mortgage5/5 ARMs43 states
BMO Harris5- and 7-year ARMsAll 50 states
Chase5/6 and 7/6 ARMs36 states and the District of Columbia
Bank of America5/6, 7/6 and 10/6 ARMsAll 50 states

What is an ARM loan?

An ARM loan is a mortgage with an interest rate that changes. They typically feature a lower interest rate than 30-year fixed mortgages for a set time period, lasting between one month and 10 years. Most adjustable-rate loans are considered “hybrid mortgages,” which simply means they combine a temporary fixed-rate mortgage with an adjustable-rate mortgage.

How do adjustable-rate mortgages work?

An ARM loan has six components you need to understand to help you decide whether it’s the best mortgage type for you.

  1. Initial fixed-rate period. This is the start or “teaser” interest rate you’re charged for the time period of your choice. Most ARM programs are advertised with two numbers such as a 5/1 ARM. The first number represents the initial fixed-rate period, so a 5/1 ARM offers a rate fixed for the first five years. The most common initial fixed-rate ARM periods are three, five, seven and 10 years.
  2. Adjustment period. This number tells you how often your rate will adjust and is typically the second number in an ARM program description. For example, the “1” in the 5/1 ARM we mentioned above represents one year, which means when the five-year initial-rate period ends, the rate adjusts every year after. Most ARMs feature a one-year adjustment period, although some programs may adjust monthly or every six months.
  3. First payment adjustment. You’ll want to keep track of the date and how much your first adjustment might be. Federal law requires lenders to give you at least 60 days’ advance notice before your ARM rate changes.
  4. Index. The index is a benchmark interest rate that fluctuates based on financial market conditions. This is the “adjusting” part of an ARM loan that can rise or fall depending on economic factors. Most current ARM programs use the Cost of Funds Index (COFI) or the one-year Constant Maturity Treasury (CMT) securities index.
  5. Margin. The margin is a fixed number of percentage points added to your index to calculate your interest rate after the initial fixed-rate period ends. The amount of the margin is set by your loan agreement and varies based on the ARM program you choose.
  6. Caps. A cap is a limit on how much your interest rate can rise after your teaser rate period ends. There are three types of caps you need to keep track of with an ARM loan.
  • Initial adjustment cap. This reflects the maximum your rate can rise after the initial fixed-rate period ends.
  • Subsequent adjustment cap. This cap limits how much your mortgage rate can increase in each adjustment period after the first one.
  • Lifetime cap. This cap restricts how high your rate can increase over the life of the loan.

ARM caps are disclosed with three numbers. For example, a 5/1 ARM with 5/2/5 caps means the following:

  • The first “5” represents the maximum the interest rate can increase after the initial fixed period ends
  • The “2” represents the maximum the interest rate increase during each adjustment period
  • The final “5” reflects the maximum the rate can go up over the life of the loan

Adjustable-rate mortgage example

Federal law requires lenders to provide the Consumer Handbook on Adjustable-Rate Mortgages (CHARMs) disclosure booklet and a loan estimate that details how much your rate and payment can change over time. However, the booklet is 13 pages long and may be hard to get through if you’re not familiar with mortgage terminology. To simplify things, here’s an example of how a 5/1 ARM with 5/2/5 caps could adjust if you’re borrowing $300,000 with an initial 2.5% rate.

Interest rate for first five years2.50%
Interest rate for first five years2.50%
Principal and interest (P&I) payment first 5 years$1,185.36
Interest rate maximum after five years7.50%
Maximum P & I payment after five years$1,952.62
Maximum rate over the life of the loan7.50%
Maximum payment over life of the loan$1,952.62

Different types of ARMs

There are two common types of ARMs: hybrid ARMs and interest-only ARMs.

Hybrid ARMs. As explained above, hybrid ARMs combine an initial fixed-rate loan with an adjustable-rate mortgage after the teaser-rate period ends.

Interest-only ARMs. An interest-only ARM allows qualified borrowers to pay only the interest due on the loan for a set time, usually between three and 10 years. During that time the loan balance isn’t paid down at all.


There is another type of ARM that is rarely offered, called a payment-option ARM. It allows borrowers to choose different “options” for how they pay their loan. The three choices typically include a principal and interest payment, an interest-only payment and a minimum or “limited” payment.

With the limited payment option, borrowers can opt to pay less than the interest accruing on their mortgage, and add the unpaid interest to the loan balance. They were popular in the years leading up to the 2008 housing crash, and most lenders steer away from them.

Conventional, FHA and VA ARMs

Adjustable-rate mortgage options are available for conventional loans, loans backed by the Federal Housing Administration (FHA) and loans guaranteed by the U.S. Department of Veterans Affairs (VA).

A few things worth noting about ARMs with each type of loan program:

  • Conventional ARMs require a higher minimum down payment. You’ll need at least 5% down for an ARM loan compared with only 3% for fixed-rate conventional loan programs.
  • FHA ARMs allow lower minimum credit scores and down payments. Borrowers with scores as low as 580 may qualify for an FHA ARM with a 3.5% down payment.
  • VA ARMs come with restrictions on yearly adjustments. To protect military borrowers from unaffordable rate increases, the VA caps the initial and subsequent caps to 1% yearly on hybrid ARMs that adjust in less than five years.

When should you choose an ARM?

An ARM loan makes sense if you need to save money over a short period of time. You should choose an adjustable-rate mortgage if:

  • You have time-specific savings goals you can accomplish before the initial fixed-rate period ends
  • You plan to sell your home or refinance before the first rate adjustment
  • You can afford the lifetime maximum payment
  • You can’t afford the payment attached to rates on current 30-year fixed-rate mortgages

Fixed rate vs. variable rate: Which is better?

A fixed-rate mortgage is better if you prefer predictability in your monthly principal and interest payment and have long-term plans to stay in your home.

An adjustable-rate mortgage is better if you need to save money for a brief period and have a plan to refinance or sell your home before the initial fixed-rate period is over.

ARM loan requirements

Because of the risk of your monthly payment becoming unaffordable due to ARM loan rate increases, lenders set more stringent qualifying guidelines than fixed-rate mortgages. In general, you’ll need:

Higher credit score minimums. Conventional loans may require a score of 640 versus the standard 620 score for fixed-rate mortgages.

Higher down payment minimums. You’ll need to come up with a higher down payment if you choose a conventional ARM loan to buy a primary residence or vacation home.

Proof you can qualify at the fully indexed payment. Some ARM programs require proof that you can qualify at the “fully indexed” payment, which is typically the maximum payment amount allowed over the life of the loan. Check with your loan officer to make sure you know the guidelines.

FAQs about ARM rates

Yes, you can refinance a current ARM to a new ARM loan as long as you qualify.

Yes, as long as you meet the minimum fixed-rate mortgage requirements.

The rate and monthly payment could become unaffordable, making it difficult to manage your monthly payments. If you are unable to make payments, you could go into mortgage default and the lender could foreclose on your home.

Your rate can only go as high as the lifetime cap spelled out in your loan terms. Be sure you review the amortization schedule that comes with your ARM plan so you know the worst case scenario.