An adjustable-rate mortgage (ARM) has a fixed rate for an initial period, then adjusts periodically based on the market. It often starts with lower rates than fixed loans.
Key Characteristics
Initial fixed-rate period followed by variable rate
Interest rate adjusts based on market index
Lower introductory rates
Rate caps limit how much interest can change
Loan Types
5/1 ARM
Fixed rate for 5 years, then adjusts annually.
Common option with balanced term
7/1 ARM
Fixed rate for 7 years, then adjusts yearly.
Suits medium-term buyers
Credit Score Requirements
Minimum Score:
620
Recommended: 680+ for best terms
PMI Impact: PMI may apply under 20% down
Down Payment Options
Minimum: 5%
Typical Range: 5%–20%
No PMI Threshold: 20% or more
Private Mortgage Insurance (PMI)
Required If: Down < 20%
Cancellation Point: After 80% LTV
Cost Factors: Rate changes and equity
Debt-to-Income Ratio
Typical Maximum: 43%
May vary with lender risk tolerance
Documentation Requirements
Credit report and score
Income and employment records
Loan Terms
Common Terms:
5/1, 7/1, 10/1
Rate Types: Adjustable-rate
Best For
Short- to medium-term buyers
Borrowers expecting rate drops or relocation
Pros
Lower initial interest rate
Lower early monthly payments
Potential savings if rates fall
Cons
Rate and payment uncertainty after fixed period
Risk of higher payments later
Summary
ARMs offer a low entry cost and can save money in the short term. They’re best for buyers who plan to refinance or move before the rate adjusts.