Is Now A Good Time To Get An ARM? (2024)

In today’s market, getting an adjustable-rate mortgage (ARM) makes a lot of sense. These loans are more attractive when home prices and interest rates are high.

ARMs typically have lower fixed introductory rates that make them less expensive than 30-year fixed-rate mortgages for the first several years. You can see current ARM rates below:

After the fixed introductory period, the rate on an ARM adjusts periodically to reflect market rates. Most ARMs adjust every six or 12 months. If interest rates go down, an ARM’s rate can go down as well. This makes ARMs an appealing option if you think rates will trend lower in the years ahead. At the same time, if interest rates increase and the ARM’s rate adjusts higher, you would need to cover the difference.

ARM Popularity Has Cooled

As elevated interest rates and tight supply continue to hamper housing affordability, overall mortgage demand has cooled the last couple of years. ARMs have been no exception. In late November 2023, 8.1% of all mortgage applications were for ARMs, according to the Mortgage Bankers Association. That’s down from a year earlier when ARMs represented about 9% of all mortgage applications.

With the Federal Reserve slashing rates by 50 basis points on September 18 for the first time in four years,it’s reasonable to expect ARM demand to continue to fall as fixed mortgage rates become more attractive.

That said, despite mortgage activity dampening, ARMs saw a slight surge this year when fixed mortgage rates were on the rise. In the week ending October 6, ARM applications represented 9.2% of all mortgage activity—the highest level since November 2022—led by a decline in ARM rates even as fixed rates increased.

Although ARMs come with some risks, they can be a helpful choice for motivated buyers who need the extra savings that ARMs offer in a high-rate environment. Rate caps that limit how much your rate can adjust can also soften the blow of any increase.

“An [ARM] is a good option to get us through this difficult rate period that we’re in,” says Melissa Cohn, regional vice president of William Raveis Mortgage. “The slew of issues affecting the economy will, at some point, be sorted. But until that happens, an ARM may be the way to go for buyers who hope to finalize a deal and buy a home that they can afford.”

Related: Current ARM Rates

Is an ARM a Good Idea?

An ARM might be a good idea if you:

• Plan to sell your home within a few years
• Think interest rates will go down considerably in the long run
• Expect your income to increase before your ARM adjusts
• Could use other assets to pay off your mortgage early and reduce your total mortgage interest if rates spike
• Are comfortable with uncertainty about your future rate and payment
• Could still afford the monthly payment if your rate reached the lifetime adjustment cap
• Will use the monthly savings during the initial term to make long-term investments (in your retirement account, for example)

What Influences ARM Rates?

The same factors that affect fixed mortgage rates influence ARM rates. These factors include the Fed funds rate and general economic conditions.

Your financial strength as a borrower, including your credit score, affects your margin—the component of your adjustable rate that doesn’t change.

A unique factor that affects ARM rates is the index rate. This rate influences how much your mortgage rate changes at each adjustment and is typically based on the secured overnight financing rate (SOFR).

How Does an ARM Work?

Unlike a fixed-rate mortgage, which comes with a rate that will stay the same throughout the life of the loan, an ARM has a rate that could change in the future. However, this potential fluctuation won’t begin immediately.

Instead, an ARM’s rate will be fixed for a period of time at the start of the loan—usually three to 10 years. Afterward, the rate adjusts periodically—usually every 6 or 12 months—to reflect market rates. However, some borrowers might accept the risk of their rate rising in return for the initial savings.

“A lot of my clients are upset they missed out on the extremely low interest rates but still want to purchase a home,” says Jamie Camp, a California-based realtor with The Agency. “Since we’re turning a corner and the market is shifting to a buyer’s market, an ARM loan can help keep monthly payments lower, so I encourage buyers to look into one as an option due to the rising interest rates.”

Remember that an ARM usually comes with interest rate caps that will limit how much your rate can change, which can help keep payments more manageable for borrowers. Additionally, you could opt to refinance an ARM into a fixed-rate loan in the future, provided you meet the mortgage lender qualifications. So if rates start dropping, you might have an opportunity to refinance into a fixed-rate mortgage with a lower rate.

Pros and Cons of ARMs

It’s important to weigh the advantages and disadvantages of an ARM before applying for one to make sure you will be able to afford the mortgage when the rate begins to adjust.

Pros of ARMs

• Lower rates. A clear advantage of an ARM is a considerably lower interest rate compared to rates on fixed-rate loans for at least the first few years of the loan.
• Might reduce your payments. During the initial fixed-rate phase of the loan, your payments could be lower compared to what you’d pay with a fixed-rate loan. Depending on the state of the market, this might even continue into the adjustable-rate portion of your repayment period.
• More flexibility. If you’re not planning on staying in your home for long, an ARM could allow you to take advantage of low payments during the first part of the loan before selling your house. This could be especially helpful if you expect your financial situation to change in the near future.

Cons of ARMs

• Payments could go up. Once your loan enters the adjustable-rate phase, your payments could rise or fall depending on the market. While lenders generally have rate caps in place, you might still find yourself making payments that are much higher compared to what you started with.
• May not be able to sell your home or refinance. Personal or economic factors could end up preventing you from selling the home or refinancing your ARM before the fixed introductory period ends. If that happens, you’ll need to make sure you can cover the cost of the loan once your rate adjusts.
• Can be hard to plan for the future. Outside of the fixed-rate portion of your loan, your payments could fluctuate frequently, which can make it hard to make other financial decisions.

Frequently Asked Questions (FAQs)