Adjustable Rate Mortgage (ARM) Guide

Buying a home isn't just a milestone; it’s likely the biggest financial move you’ll ever make. Navigating today's market successfully requires careful strategic planning—from hunting down the perfect neighborhood to choosing a financing strategy that protects your wallet.

When it comes to financing, your choice of loan dictates how much you can comfortably afford each month. If you want lower upfront costs, an adjustable-rate mortgage (ARM) often delivers lower initial interest rates and smaller monthly payments during the introductory period compared to a conventional 30-year fixed mortgage.

Below, we break down everything you need to know about adjustable-rate mortgages (ARMs), how they stack up against fixed-rate options, and how to decide if an ARM aligns with your long-term financial goals.

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a type of mortgage with an introductory period—such as 5 or 7 years—during which the initial interest rate is fixed at a low level.

After the introductory period ends, the interest rate on an adjustable-rate mortgage (ARM) will change based on two key market factors, the index and the margin. The index is a benchmark interest rate that fluctuates based on market conditions. The margin is a fixed percentage set by a lender for a specific schedule, such as every six months or every year.

The total interest rate you will pay on an ARM is the sum of the index and the margin, known as the fully indexed rate. The index may rise or fall with the market, which means your rate—and your monthly payment—will rise or fall, too.

Example of ARM Savings vs. Fixed-Rate Mortgage

To illustrate how an ARM results in savings, let us consider a $300,000 mortgage with a 20% down payment ($60,000) on a 5/1 ARM (fixed interest rate for 5 years) compared to a 30-year conventional loan. Please note that the calculations in these examples reflect the principal and interest only, and that actual interest rates and payments may vary.

5/1 ARM

Interest Rate: 5.50%

Monthly Payment: $1,931

30-Year Fixed

Interest Rate: 6.50%

Monthly Payment: $2,085

Difference: $154 saved each month with a 5/1 ARM ($2,085 minus $1,931). This results in $9,240 in savings after all 60 monthly payments are completed during the five-year introductory period. If you're interested in estimating mortgage payments based on factors such as the home's price, interest rate, and monthly debts, be sure to use our home affordability calculator.

Reasons to Consider an ARM

Lower Initial Interest Rate: One of the primary reasons homebuyers consider an ARM is that it usually offers a lower initial rate than a conventional fixed-rate mortgage. This lower rate can make homeownership more affordable in the early years of the loan.

Lower Initial Mortgage Payments: A lower interest rate can lead to reduced monthly payments during the initial fixed period, allowing you to save money in the short term. You can set these savings aside for future use or spend them on other housing expenses.

Flexibility to Refinance: As the introductory period or your ARM nears its end, you may consider refinancing to a conventional fixed-rate mortgage. This could help you secure a stable monthly payment and avoid potential interest rate increases.

You're a Short-Term Homeowner: If you're buying a starter home or anticipating a career change or a growing family, you may consider moving to a different home in the future, perhaps in five to seven years. In this situation, an adjustable-rate mortgage (ARM) can be beneficial as it offers lower payments during the initial period.

Interest Rates Might Drop: It is impossible to predict whether interest rates will rise or fall, as numerous market factors influence them. However, if interest rates decrease after your ARM's introductory period ends (which is not guaranteed), your mortgage payment may also be lowered.

Important Things to Consider About ARMs

When considering an adjustable-rate mortgage (ARM), it's important to consider a couple of key factors to fully understand its implications. The first of these factors is the interest rate structure. Although the introductory rate is generally lower, it may change after the initial period ends.

If market conditions cause the rate to increase, you could find yourself paying more on your monthly mortgage payment. This increase might make it challenging to cover your everyday living expenses and to save money for the future.

Next, if you intend to stay in your home and keep the ARM after the initial rate reset, you should prepare for potentially higher monthly payments. This means it's important to keep an eye on your budget during the introductory period and to set aside extra funds in case your interest rate rises. Maintaining a disciplined and thoughtful approach to saving can be challenging, but it is necessary for your financial stability.

An adjustable-rate mortgage (ARM) can be a beneficial option, as it offers lower initial payments and the potential for savings. However, it's crucial to fully understand its structure and the possibility of future rate increases before committing to an ARM.

If you're considering this type of mortgage or would like to learn more, contact a mortgage banker. We offer ARMs, along with a variety of other mortgage products, at competitive interest rates and flexible term options.¹

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Ameris Bank does not endorse nor is affiliated with the companies listed in this article.

¹ All loans subject to credit approval.