Adjustable rate mortgages (ARM)

How an adjustable rate mortgage works

Every ARM has two phases. During the initial fixed period, usually five, seven or ten years, your rate and payment behave exactly like a fixed loan. After that the loan enters the adjustment period: the rate resets at set intervals to an index plus a margin. On most conventional ARMs today the index is the 30-day average SOFR and the rate adjusts every six months.

The name tells you the structure. A 7/6 ARM is fixed for seven years and adjusts every six months after that. A 10/6 is fixed for ten.

Caps protect you

An ARM rate cannot move without limit. Three caps control it: the initial cap on the first adjustment, the periodic cap on each adjustment after that, and the lifetime cap, the most the rate can ever rise above where it started. Caps vary by loan, so we show you the exact structure in writing before you choose. Your Loan Estimate also shows the highest payment the loan could reach.

Benefits of adjustable loans

• A lower starting rate, when ARMs are priced below fixed rates, which lowers the payment during the years most people actually keep a loan.
• A good fit for shorter stays. If you expect to move, sell or refinance within the fixed period, you may never see an adjustment.
• Useful on larger loans. On a jumbo loan, a small difference in rate is a large difference in payment.
• The rate can fall. If market rates are lower when your loan adjusts, your rate can come down too, subject to any floor.

Who an ARM fits

For clients who expect a significant increase in income, plan to stay in the home only a few years, or want the lowest possible payment now, an adjustable rate mortgage may be the right choice. Think of a young family buying a starter condo in Northridge, a professional relocating to the Bay Area for a few years, or a buyer who plans to sell a second property and pay the loan down.

An ARM fits less well if you plan to keep the loan for decades, or if a future payment increase would strain your budget. In that case a fixed rate mortgage is the safer choice.

ARM or fixed: how to decide

Compare the two on the same day. Look at how much lower the ARM rate is, how many years it stays fixed, and what the caps allow. Then ask yourself an honest question: how likely is it that you will still have this loan when the fixed period ends? If the ARM saves meaningful money over that window and the worst-case payment is one you could handle, it may be worth it. If the spread is small, the fixed rate usually wins. Some days the ARM is not priced lower at all, and then the decision makes itself.

Our rates page prices ARMs and fixed loans for your exact scenario, and the payment calculator shows what a higher rate after adjustment would do to the payment.

ARM programs we offer

Conventional 5/6, 7/6 and 10/6 ARMs, jumbo ARMs, and adjustable options in our non-QM programs. If you already own a home with a low fixed rate and want flexible access to cash, a HELOC is itself a variable-rate line that charges interest only on what you draw.

Reading an ARM disclosure

Before you sign, you will receive an adjustable rate disclosure and a Loan Estimate that show the index, the margin, each cap and the highest rate and payment the loan could ever reach. Read that worst-case figure carefully. If you could not handle it, choose a longer fixed period or a fixed rate. If you could, and you expect to sell or refinance before then, the ARM’s savings are real.