ARM Mortgage Rates 101: Break Down the Lingo & Find Potential Savings

With so many Mortgage options available, understanding which one best fits your needs and budget can be overwhelming. Adjustable Rate Mortgages (ARMs) may sound intimidating, but if you’re looking for flexibility and maximum savings in a home loan, you should consider how an ARM may actually fit your needs and budget.

We hope this breakdown of ARM terminology and an explanation of how these home loans work will help you make an informed decision on choosing the right Mortgage for your homebuying needs.

What is an ARM?

ARMs, also known as variable rate Mortgages, typically offer a lower fixed rate during the introductory period and monthly payment in comparison to fixed rate Mortgages. Introductory periods can last for 5, 7, or 10 years, which can amount to substantial savings in interest. After the introductory period ends, the rate will adjust according to market conditions and your monthly payment may increase or decrease.

Changes to Mortgage rates are based on a benchmark index that reflects conditions in the lending industry. Because markets are unpredictable and may fluctuate, ARMs are designed with an interest rate cap to protect borrowers. An interest rate cap is the maximum limit of how high an interest rate can rise on a variable rate Mortgage.

Some local lenders understand the potential risk that comes with ARMs and may offer unique ARM options. If you're able to find the right ARM, you have the potential to save tens of thousands of dollars when compared with a 30-year fixed rate mortgage.¹

ARM Advantages

Qualifying for an ARM offers homebuyers wide-reaching benefits. Saving money is the primary advantage of selecting an ARM because borrowers usually enjoy lower rates during introductory periods, which can last for up to ten years. In addition to saving money, these are other benefits and scenarios that may make an ARM the best Mortgage option for you.

• Great For Relocation: People who may need to relocate periodically for work and other reasons may be inclined to leverage ARMs. For example, members of the military who could be deployed can take advantage of the low introductory rates during the introductory period. The same holds true for families who plan to move within a couple of years.
• Controlled Risk: Those opposed to taking financial risks sometimes shy away from ARMs. The idea that their monthly payment could increase creates stress, resulting in them opting for a fixed rate home loan with a higher interest rate. It’s essential to understand that ARM rates are capped. The ceiling includes incremental changes and a maximum increase over the life of the loan. After running the numbers on a Mortgage calculator, prospective buyers will have hard data demonstrating risk limitations.
• Opportunity to Refinance: Many homeowners may choose to refinance their Mortgage before their initial home loan is paid off in full. Whether you plan to build or improve your credit over the next ten years to receive a lower rate, or enjoy a lower interest rate for the introductory period, refinancing from an ARM into a fixed rate Mortgage down the road is a common strategy. 
• Pay Down Your Principal Faster: Borrowers sometimes secure an ARM to strategically pay off their homes quickly. Low monthly installments during the introductory period open the door to paying more each month, applying the overage directly to the principal. Rather than refinance to a fixed rate option, borrowers adjust their monthly budgets to increase their home equity faster.

Monthly Mortgage Payment Tip: Financial planning experts advise homeowners to spend no more than 28 percent of their gross income on Mortgage payments. Try our Mortgage Calculator to see what works for your budget. 

To discover if an ARM can reduce your existing mortgage payment, download our free checklist:

Decoding the Numbers: What Are the Different ARM Types

To understand the different ARM options available, you must be able to interpret it's unique naming convention. The first two digits in the ARM represent two distinct periods. The first digit refers to the number of years the preliminary introductory period lasts. The second number tells you how often the rate will change. This is also known as the "adjustment period". 

• 5/5 ARM:  A Peach State 5/5 ARM has a 5-year fixed rate period and a payment adjustment period of every 5 years thereafter. Lower numbers – 5/5 versus 10/10 – generally offer borrowers lower interest rates. That makes them attractive options to save money, buy a larger home, or pay the principal faster. The 5/5 ARM can save several hundred dollars each month compared to a 30-year fixed-rate loan. 
• 7/7 ARM: This home loan offers a 7-year fixed rate period followed by rate and payment adjustments every seven years. Although the savings are slightly lower than the 5/5 ARM, it can also save homebuyers hundreds on monthly payments compared to 30-year fixed rate mortgages.
• 10/10 ARM: The interest rate for a 10/10 ARM trends slightly higher than the 5/5 and 7/7 counterparts but is still usually lower than 30-year fixed rate options. The 10/10 ARM offers a relatively longer fixed rate period which can be ideal for borrowers who want to take advantage of additional savings on interest. 

When understood in this context, it’s abundantly clear that ARM rates are keys to saving money. A few hundred dollars each month turns into thousands annually. Over 5-10 years, the savings could be used to make home improvements or greater leisure spending. Saving just $1,000 monthly equals $12,000 annually and $120,000 over 10 years. 

Understanding ARM Lingo

Now that you've gained a better understanding of the different ARM options, the next step is decoding the jargon surrounding them. This is essential for helping you understand how ARMs work. This is the first step in determining whether this home loan option is the best fit for your homebuying needs. 

• Adjustment Period: This is how often your rate can change after the introductory period is over.
• Amortization: Means paying off a loan with regular payments over time, so that the amount you owe decreases with each payment.
• Annual Percentage Rate (APR): Describes the cost of borrowing. It includes the interest rate you’ll pay on your loan annually and any added fees.
• Finance Charges: The total cost of interest and loan charges paid over the life of the loan. This includes all pre-paid loan charges, such as: origination charges, discount points, Mortgage insurance, and other added charges.
• Index: This is the weekly average yield on the United States Treasury securities adjusted to a constant maturity of one year, as made available by the Board of Governors of the Federal Reserve System.
• Initial Rate: This is the interest rate charged at the beginning of a Mortgage, typically for a limited time.
• Interest Rate: Represents the percentage you pay to borrowing money to finance your loan, on top of the loan amount or your principal.
• Introductory Period: A set length of time at the beginning of a Mortgage where there is a special offer. It's also referred to as the “fixed period” which often lasts three, five or seven years.
• Introductory Rate: The initial interest rate charged during the introductory stages of a Mortgage.
• Lifetime Rate Cap: The maximum amount the interest rate can increase during the life of the loan.
• Margin: The number of percentage points added to the index by the Mortgage lender to set your interest rate on an ARM after the introductory rate period ends.
• Principal: The amount of a Mortgage loan that you borrow from a lender that needs to be paid back. Your monthly payment includes a portion of that principal along with interest.
• Private Mortgage Insurance (PMI): A type of Mortgage insurance that protects lenders from financial loss if a borrower defaults on a Mortgage. You might be required to pay for PMI if your down payment is less than 20 percent.
• Terms: Indicates the total amount of time it will take to repay the loan with regularly scheduled payments. 

What ARM Rates Depend On

Homebuyers can rest assured that ARM rates are based on a benchmark index that reflects conditions in the lending industry. We've already reviewed that fact that rate changes may occur ever 5, 7 or 10 years depending on the term of the ARM.

In addition to rates and introductory periods, lifetime rate caps are an important factor to compare. This feature will set a limit for how high your rate can potentially go after the introductory period ends. 

Find Competitive ARM Rates at Peach State

It's important to select the best home loan for your finances, needs, and lifestyle. If you aren't sure whether an ARM or fixed rate Mortgage is best for your financial situation, contact a lending professional you can trust.

Our Mortgage team can help you achieve your goal and find the best Mortgage option for your new home. Our Mortgage Specialists will answer any questions you have and walk you through every step of the home loan application process.

At Peach State, we understand what it takes to turn dreams of homeownership into a reality. Contact us today at 770.580.6098 or mortgage@peachstatefcu.org, and let’s start the pre-approval process together!

ARM rates are just the beginning when it comes to finding your ideal mortgage payment. Find the best payment for your budget in our free guide, "How Much House Can I Afford in Georgia or South Carolina."

1 Peach State for example has offered programs where ARM rates are more than a full percentage point below fixed-rate mortgage rates. We also set lifetime rate caps under 7 percent over the life of the loan so you understand that your payment is capped should rates rise.