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

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.

year ARM vs. fixed-rate mortgage

Instead of refinancing from an adjustable-rate mortgage to a fixed-rate, they’ll refinance to an ARM, such as a 3/1 ARM. It might be a good move for short-term lower interest rates if you plan on moving in a few years. But if you’re refinancing and you want to stay in your house for the remainder of your loan term, getting a 3/1 ARM might not make sense. It’s important to run the numbers to see both the costs and the potential savings of either option. An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change at regular intervals following an initial fixed period. With a 3/1 ARM, the initial interest rate remains fixed for three years.

Hybrid ARM loans

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Related ARM resources

The ARM’s rate can then rise, fall or stay the same, depending on the movements of the broader market. A 3-year adjustable-rate mortgage functions a lot like any other ARM. The main differentiator with these loans is the length of the introductory period, during which the interest rate stays fixed.

• In addition, the intro rate on a 7/1 ARM will be higher than on a 5/1 ARM because you get to hold onto the fixed rate for a longer time.
• The 5/1 ARM is virtually identical to the 7/1 ARM, except that the start rate will adjust after the first five years, rather than seven years.
• These adjustments can lead to fluctuations in monthly mortgage payments, making it crucial for borrowers to comprehend the workings of ARM rates.
• A 3-year ARM has a fixed “teaser” interest rate for the first three years of the loan.
• For instance, if you expect to own your house for only three to five years, look at 3/1 and 5/1 ARMs.
• The national average 5/1 ARM refinance interest rate is 6.41%, down compared to last week’s of 6.42%.

Current 3/1 ARM rates

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.

• 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.
• 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.
• Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage.
• That way you can make sure you’re getting the best deal on your home loan.
• On a 30-year mortgage, the adjustable period lasts for 27 years― the rest of the loan term.
• To make sure you can repay the loan, some ARM programs require that you qualify at the maximum possible interest rate based on the terms of your ARM loan.
• This is generally the safer type of 3-year ARM for most people, since there is no potential for negative amortization.

How to get a personal loan with bad credit

Kim Porter is an expert on credit, mortgages, student loans, and debt management. 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. An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

• Following this fixed period, the rate adjusts periodically, typically annually, based on prevailing market conditions and an index specified in the loan terms.
• 3-year ARMs, like other ARM loans, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise.
• Your specific interest rate will depend on several different factors, from your lender to your credit score to your down payment.
• When you get a mortgage, you can choose a fixed interest rate or one that changes.
• If you can’t afford that payment, then an ARM may not be a good choice for you.
• This can help you understand what your ARM would look like if rates were to spike and stay high.

Key features of the 7-year ARM

The following table compares ARM rates to rates on other types of loans. The main risk with an ARM is that the rate will increase along with your monthly payments. The lender repeats the steps to adjust the interest rate and calculate the monthly payment every six months. A payment-option ARM, however, could result in negative amortization, meaning the balance of your loan increases because you aren’t paying enough to cover interest. If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments. The easiest way to shop for an ARM loan is to choose one with a start rate period that comes close to the time in which you expect to own the home or have the loan.

What does a 3/1 adjustable-rate mortgage mean?

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 best 3 year fixed rate mortgage 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.

Mobile Or Manufactured Home Loans

• It’s important to know whether the loans you are considering have a higher initial adjustment cap.
• That means that you might only be able to get a mortgage that’s backed by the FHA (first-time homebuyers) or the USDA (those buying a home in a rural area).
• For instance, if the SOFR rate is 2.0% and your margin is 2.5%, your ARM interest rate would be 4.5 percent.
• But once the adjustable rate kicks in, you can expect higher monthly payments (though within certain limits).
• With this type of mortgage, the actual indexed rate is fixed for the first three years of the loan, and then adjusts every year thereafter, a sort of hybrid between a fixed rate and an adjustable rate.
• If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance.
• Understanding its features, advantages, and potential risks is crucial for borrowers aiming to leverage this mortgage option effectively.

On the other hand, if you have a lot of cash on-hand, you can make a big down payment and buy mortgage points. If your interest rate is set at 3.5%, then your monthly P&I payment will remain at $718 until you pay off the loan or refinance. Always read the adjustable-rate loan disclosures that come with the ARM program you’re offered to make sure you understand how much and how often your rate could adjust. There are several moving parts to an adjustable-rate mortgage, which make calculating what your ARM rate will be down the road a little tricky.

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

In addition to regular rate resets, these loans typical get recast every 5 years or whenever a maximum negative amortization limit of 110% to 125% of the initial loan amount is reached. Teaser rates on a 3-year mortgage are higher than rates on 1-year ARMs, but they’re generally lower than rates on a 5 or 7-year ARM or a fixed rate mortgage. I’ve covered the housing market, mortgages and real estate for the past 12 years. At Bankrate, my areas of focus include first-time homebuyers and mortgage rate trends, and I’m especially interested in the housing needs of baby boomers. In the past, I’ve reported on market indicators like home sales and supply, as well as the real estate brokerage business. My work has been recognized by the National Association of Real Estate Editors.

Mortgage Calculators

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.

Cons of 3/1 ARMs

Adjustable-rate mortgages are named for how they work, or rather, when their rates change. As fixed-rate mortgages become more expensive and home prices continue to rise, expect to see ARM rates attract a new following. Here’s how ARM rates work, and how they affect your home buying power. If you take out a 3/1 ARM, you’ll receive a fixed rate for the first three years of the loan.

How a 3/1 ARM works

That’s about $96 more a month, and when compared with your monthly payment for a 30-year fixed-rate mortgage, it’s $2,940 more a year. That difference could impact you financially, especially if your budget is tight. It’s something to keep in mind as you check your finances before deciding on a mortgage. Every time your lender adjusts your interest rate, they’ll also recalculate the mortgage payment so you pay off the loan by the end of your term. 3-year ARMs, like other ARM loans, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise.

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.

If you still have the ARM loan when the adjustment period begins, your rate could increase. A 5/1 ARM, for example, comes with a five-year initial period during which the rate is fixed. A 3/1 ARM means you have a fixed interest rate for three years, and your interest rate adjusts each year after that. Generally speaking, a shorter fixed-rate period will get you a lower starting interest rate. A 3/6 ARM, for instance, will usually have a lower initial interest rate than a 7/1 ARM, and a 7/1 ARM will have a lower rate than a 10/1 ARM.

1 vs 10/1 ARM rates

At Bankrate, I’m focused on all of the factors that affect mortgage rates and home equity. I enjoy distilling data and expert advice into takeaways borrowers can use. Prior to Bankrate, I wrote and edited for Rocket Mortgage/Quicken Loans.

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

Homebuyers typically choose ARMs to save money temporarily since the initial rates are usually lower than the rates on current fixed-rate mortgages. A 3-Year ARM mortgage is a type of home loan where the interest rate remains fixed for the initial three years. Following this fixed period, the rate adjusts periodically, typically annually, based on prevailing market conditions and an index specified in the loan terms. These adjustments can lead to fluctuations in monthly mortgage payments, making it crucial for borrowers to comprehend the workings of ARM rates. In analyzing different 3-year mortgages, you might wonder which index is better. In truth, there are no good or bad indexes, and when compared at macro levels, there aren’t huge differences.

After 36 months have passed, the homebuyer’s initial rate becomes a fully indexed interest rate that’s equal to a changing index rate plus a margin, which is a fixed percentage. The interest rate on an adjustable-rate mortgage can rise or fall. One of the most common rate cap structures is the 2/2/5 cap structure. You may need a score of 640 for a conventional ARM, compared to 620 for fixed-rate loans.

When your ARM adjusts to a higher rate, your monthly payment increases. When the loan adjusts to a lower rate, your payment will decrease. An adjustable-rate mortgage starts off with a fixed interest rate for a certain period of time.