3 1 ARM: Your Guide to 3-Year Adjustable-Rate Mortgages

Let’s say you’re looking to buy a home worth $200,000 with a 20% down payment. Your lender offers you a 3/1 ARM with an initial rate of 3% and a cap structure of 2/2/5. But when fixed interest rates are at all-time lows, there’s not much of an advantage to choosing an adjustable rate.

How does a 3-year ARM loan work?

The “limited” payment allowed you to pay less than the interest due each month — which meant the unpaid interest was added to the loan balance. When housing values took a nosedive, many homeowners ended up with underwater mortgages — loan balances higher than the value of their homes. The foreclosure wave that followed prompted the federal government to heavily restrict this type of ARM, and it’s rare to find one today. In order for this to happen, mortgage rates would need to drop, bringing the index used to calculate your ARM’s rate down in tandem. A 5/1 ARM rate gives you an initial rate that’s fixed for five years, and then adjusts every year for the rest of the loan’s term. ARM lenders may require a higher credit score, larger down payment or restrict the amount of equity you can tap.

Payment option ARM loans

To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors. Bankrate has reviewed and partners with these lenders, and the two lenders shown first have the highest combined Bankrate Score and customer ratings. You can use the drop downs to explore beyond these lenders and find the best option for you. For instance, if you expect to own your house for only three to five years, look at 3/1 and 5/1 ARMs. But if you’re unsure how long you plan to stay in the home, a 7/1 or 10/1 ARM might be a safer choice.

ARM rates are low for buying and refinancing

And since you’ll pay off your current mortgage when you sell, you won’t have to worry about higher ratesand payment amounts. The table below is updated daily with 3-year ARM rates for the most common types of home loans. Compare week-over-week changes to current adjustable-rate mortgages and annual percentage rates (APR). The APR includes both the interest rate and lender fees for a more realistic value comparison. ARMs come with rate caps that insulate you from possible steep year-to-year increases in monthly payments.

Can I switch from an ARM to a fixed-rate loan without refinancing?

Whether you’re just comparing 3 year ARM rates or ready to get started on a mortgage, we can help make the process of refinancing or buying a home fast and easy. The index rate can change, but the margin stays the same each time the rate resets. There are also limits — or caps — to how much the interest rate can increase. ARM loan guidelines require a 5% minimum down payment, compared to the 3% minimum for fixed-rate conventional loans. In contrast to a 3/1 ARM, a fixed-rate mortgage keeps the same interest rate for the life of the loan. If you choose a 30-year fixed-rate mortgage, for example, your interest rate won’t change for those 30 years.

Compare Current ARM Rates and Best ARM Lenders Today

Not having a prepayment penalty allows you to pay off your mortgage early if you are ever able. Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky-high rates. These caps limit how much interest rates can increase once interest rates adjust. There are interest rate caps that limit how high interest rates can climb each year as well as ones that prevent interest rates from rising too much over the course of the entire loan term.

Jumbo loans

A 3-year ARM gives you a fixed interest rate for the first three years of your loan. After that, your rate adjusts regularly for the remaining 27 years of your mortgage. Refinancing gives you a chance to take advantage of low monthly payments now and predictable payments later (after you refinance). With a 3-year ARM, you’ll enjoy low monthly payments for the first three years, but then you’ll have unpredictable — likely, higher — bills every 6–12 months.

How 3/1 ARM Rates Stack Up Against Other Mortgage Rates

So after the 5-year fixed-rate period, your rate can adjust once per year for the next 25 years, or until you refinance or sell the home. Almost all ARM loans today are “hybrid ARMs.” These have an initial period of 3-10 years where the interest rate is fixed. In fact, these initial introductory rates — sometimes called “teaser rates” — are often lower than those of a fixed-rate loan. With a 3/1 ARM, your mortgage rate is fixed for three years and then adjusts once a year for the rest of the loan term. At the beginning of your mortgage, ARMs work just like fixed-rate loans.

• An adjustable-rate mortgage, or ARM, is a home loan that has an initial, low fixed-rate period of several years.
• Similarly, the rates of a 10/1 ARM are fixed for the first 10 years and will adjust annually for the remaining life of the loan.
• The lowest 3/1 ARM mortgage rates are typically reserved for the folks with the best financial track records.
• An adjustable-rate mortgage starts off with a fixed interest rate for a certain period of time.
• Adjust the graph below to see 3-year ARM rate trends tailored to your loan program, credit score, down payment and location.
• Adjustable-rate mortgages are named for how they work, or rather, when their rates change.
• Here’s a comparison of ARM loan payments against the two most popular types of fixed-rate mortgages, with all other things being equal, assuming an adjustment to the maximum payment cap.

What is a 3-Year ARM Mortgage?

Just as rate caps are put in place to protect borrowers, rate floors are there to protect lenders. The floor limits the amount your ARM rate can drop if the general rate market is falling and your rate adjusts downward. Also referred to as a “teaser rate” or “intro rate,” your start rate is the best 3 year fixed rate mortgage ARM’s initial interest rate. This typically lasts 3, 5, 7, or 10 years, with a 5-year fixed intro rate being the most common. ARM start rates are frequently lower than those of a fixed-rate loan. Keep in mind that a 5/1 ARM (and most other ARM loans) still have a total loan term of 30 years.

How a 3/1 ARM works

Yes, you always have the option to refinance an ARM into a fixed-rate loan — as long as you can qualify based on your credit, income and debt. You can use the savings to pay off your mortgage faster and build home equity. Alternatively, you can use the funds for other financial goals, like saving for college or retirement.

Further variations include FHA ARMs and VA ARMs, which are basically the government-backed versions of a conventional ARM, with their own set of qualifications. These are ARMs that allow you to convert your balance to a fixed rate, usually for a fee. In general, each type of loan has a different repayment and risk profile. The following graph is for a 5/1 ARM, but it does a good job of showing how payments can change over time.

• Yes, you can refinance an ARM just as you can any other mortgage loan.
• After this fixed period, the rate becomes variable, changing once per year.
• However, it cannot increase by more than 5% above the start rate over the life of the loan.
• Your payment is smaller for the initial period, but you aren’t paying back any principle.
• In general, each type of loan has a different repayment and risk profile.
• With 27 years and roughly $173,564 left on the mortgage, your payments would now be $1,249.
• In truth, there are no good or bad indexes, and when compared at macro levels, there aren’t huge differences.

✍ Editor’s note: Lenders have replaced 3/1 ARM offerings with 3/6 ARMs

If you do that, you can pretty much shop for the ARM in the same way that you’d compare fixed-rate home loans. This loan type offers lower introductory rates and payments but still comes with the security of a fully-amortized schedule that starts paying down your loan balance from day one. The “fully-indexed rate” on an ARM is the highest rate your loan has the potential to reach when it adjusts. Lenders set an ARM rate cap that determines how high your fully-indexed rate could go if interest rates were to rise substantially. Your margin will be set by several factors such as your credit score and credit history, the lender’s standard margin, and broader real estate market conditions.

Do ARM rates ever go down?

The Federal Reserve has started to taper their bond buying program. Calculate 3/1 ARMs or compare fixed, adjustable & interest-only loans side by side. Understand, however, that lenders qualify ARM borrowers differently than they do fixed-rate borrowers. LoanDepot’s easy-to-use calculator puts you in charge of estimating your mortgage payment. ARMs are often tied to mortgage index rates such as the London Interbank Offered Rate (LIBOR), which is the most common benchmark that banks around the globe use to set short-term interest rates.

Interest-only ARM loans

Generally, the longer the I-O period, the higher the monthly payments will be after the I-O period ends. These loans are generally priced more attractively initially, because there is more potential profit for the lender. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.

How to Get the Lowest 3/1 ARM Rates

Oftentimes, lenders check your ARM eligibility based on the loan’s fully-indexed rate, which is the highest it could go after adjusting. This protects you as a borrower because it helps ensure you can afford your payments if the rate increases later on. But it also means you don’t get the benefit of qualifying at the ultra-low intro rate. Lenders typically use the fully-indexed rate to qualify you for an ARM loan, rather than the lower intro rate. This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires. In this way, an adjustable-rate mortgage works differently than one with a fixed interest rate.

Current ARM mortgage rates: Are they lower than fixed rates?

Then, based on several factors, the rate may increase or decrease once a year for the rest of your loan term. It allows you to choose among four types of payment types in any given month. Generally these types of loans, while offering some flexibility to those with uneven incomes, have the greatest potential downside, since the potential for negative amortization is great.

But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment. An adjustable-rate mortgage is a type of home loan with an interest rate that can change over the life of the loan. Sean Briscoe, Director of Products and Payments at Alliant Credit Union, says the variety of ways you can use a personal loan is a major benefit — especially when you’re facing a cash-only expense. It can be confusing to understand the different numbers detailed in your ARM paperwork. To make it a little easier, we’ve laid out an example that explains what each number means and how it could affect your rate, assuming you’re offered a 5/1 ARM with 2/2/5 caps at a 5% initial rate. Because ARM rates can potentially increase over time, it often only makes sense to get an ARM loan if you need a short-term way to free up monthly cash flow and you understand the pros and cons.

To figure out if you’ll save money, compare 3/1 ARM interest rates with 30-year fixed rates. Ask the lender which index influences the ARM interest rates and whether the loan comes with rate caps. By taking out a 3/1 ARM, your home costs might be cheaper for a few years.

• Yes, if your ARM loan comes with a “conversion option.” Lenders may offer this choice with conditions and potentially an extra cost, allowing you to convert your ARM loan to a fixed-rate loan.
• Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage.
• This is generally the safer type of 3-year ARM for most people, since there is no potential for negative amortization.
• On a 30-year mortgage, the adjustable period lasts for 27 years― the rest of the loan term.
• To make it a little easier, we’ve laid out an example that explains what each number means and how it could affect your rate, assuming you’re offered a 5/1 ARM with 2/2/5 caps at a 5% initial rate.

In addition, those with a mortgage worth more than $750,000 cannot claim the deduction. If your margin is 2 percentage points and the SOFR is 0.15%, then your interest rate would be 2.15%. Reina Marszalek has over 10 years of experience in personal finance and is a senior mortgage editor at Credible. If a personal loan isn’t right for you, you might consider one of the following alternatives.

A 3-Year ARM mortgage can offer initial affordability and flexibility, yet it demands careful consideration and planning. Understanding its features, advantages, and potential risks is crucial for borrowers aiming to leverage this mortgage option effectively. Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can rise or fall.

Interest-only loans can give you even lower starting monthly payments than typical ARMs. But your monthly payments will go up once principal payments and rate adjustments kick in. Here’s a comparison of ARM loan payments against the two most popular types of fixed-rate mortgages, with all other things being equal, assuming an adjustment to the maximum payment cap. I’ve covered mortgages, real estate and personal finance since 2020.