An adjustable-rate mortgage starts with a fixed rate for 5, 7, or 10 years, then adjusts every six months with the market. The lower starting rate can make a real difference in today's rate environment, especially if you expect to sell, refinance, or move before the fixed period ends. Marc Hendrickson will show you the worst-case payment, not just the starting one.
Every ARM has caps that limit how far the rate can move. Most conforming ARMs today use one of two cap structures, written as three numbers: the first adjustment, each later adjustment, and the lifetime maximum.
These are the standard cap structures for conforming SOFR ARMs. Always check the specific loan disclosure.
The rate can also come down if the market does. Marc will show you the payment at the start, at the first adjustment, and at the lifetime cap, so there are no surprises.
An ARM is a bet that you'll be out of the loan, or into a new one, before the fixed period ends. For the right buyer, that bet is a good one.
Job changes and military orders often mean a few years in one home. With Joint Base Lewis-McChord nearby, a 5 or 7 year fixed period can line up well with a typical assignment.
If you expect rates to fall or your finances to change, an ARM's lower start rate can carry you until you refinance into a fixed rate. Refinance options.
A lower starting rate frees up monthly cash for the first several years, which can matter on a larger loan.
Once the fixed period ends, your rate isn't set by the lender's mood that day. It follows a published formula you can check yourself.
Conforming ARMs use the 30-day average of SOFR, a benchmark published every business day. It moves with short-term interest rates across the market.
A fixed number of percentage points added to the index. It's set when you take out the loan and never changes, so it's worth comparing between offers.
Index plus margin equals your new rate at each adjustment, limited by the caps. If the index is 4.00% and your margin is 2.75%, the formula rate is 6.75%.
An ARM is one of several ways Marc helps buyers manage today's rates. Here's how it compares with the alternatives.
A fixed rate never changes, which is worth paying for if you'll stay put for a long time. An ARM costs less up front if you won't.
A 2-1 or 1-0 buydown lowers your rate for the first year or two while keeping a fixed rate long term. Sellers often pay for it as a concession.
Paying points at closing lowers a fixed rate for the life of the loan. It makes the most sense if you'll keep the loan past the break-even point.
Adjustable rates are common on larger loans, where the payment difference is biggest. Jumbo loans.
Lenders qualify 5/6 borrowers at the higher of the fully indexed rate or the start rate plus 2 points, which builds in a cushion.
You can refinance out of an ARM into a fixed rate at any time, subject to qualifying and closing costs.
Marc shows you the payment at the start, at the first adjustment, and at the lifetime cap, so you can decide with the full range in front of you.
Seller-paid concessions, 2-1 and 1-0 temporary buydowns, and permanent buydowns can all lower your payment. Marc structures the loan around what actually moves your monthly number.
Marc funds and closes loans directly, works with a local appraisal company, and sends funds to escrow early on closing day, so your file isn't stuck in someone else's queue.
When does an ARM make sense?
Typically when you plan to sell, refinance, or move before the fixed period ends. If you'll keep the home for decades, a fixed rate is usually the safer choice.
What happens when the fixed period ends?
The rate starts adjusting every six months based on the index plus a fixed margin, within the loan's caps.
What is SOFR?
The Secured Overnight Financing Rate, a benchmark based on overnight lending backed by Treasury securities. Conforming ARMs use its 30-day average as their index.
How do ARM caps work?
Caps limit how much the rate can move at the first adjustment, at each later adjustment, and over the life of the loan. A 5/6 ARM commonly uses 2/1/5 caps, while 7/6 and 10/6 ARMs use 5/1/5.
Can my rate go down?
Yes. If the index falls, your rate can adjust down at the next change date, though many ARMs won't go below the margin.
How do lenders qualify me for an ARM?
For a 5/6 ARM, lenders qualify you at the higher of the fully indexed rate or the start rate plus 2 points. For 7/6 and 10/6 ARMs, it's the higher of the fully indexed rate or the start rate.
Is an ARM riskier than a fixed-rate loan?
It carries more rate uncertainty over time, which is why it fits best when you have a clear shorter-term plan for the home.
Should I consider a buydown instead of an ARM?
Possibly. A temporary or permanent buydown can lower your payment while keeping a fixed rate. Marc can compare both for your situation.
Turn Two Mortgage is based in Lake Tapps, and Marc works with ARM borrowers throughout Pierce and south King counties. See what buying and owning a home looks like in each community we serve.
Quick, custom quotes with no pressure, and an honest comparison with your other options.
