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 An Adjustable Rate Mortgage (ARM) is often viewed cautiously by borrowers shopping for a loan product. An ARM product does come with some variables that can make people nervous. However if you are shopping for a home in today’s market it is wise to evaluate all the loan programs on the table including ARMs because they may actually be the best scenario for you.

What is an ARM

An ARM is designed to be a fixed rate for a set period of time and then the rate would adjust for the remainder of the loan term. The most common ARM terms are a 5/1 ARM, 7/1 ARM and a 10/1 ARM.

These products would have a set interest rate for the first 5, 7 or 10 years of the mortgage and after that period the interest rate would adjust periodically (up or down depending on the market) for the remainder of the life of the loan.

An ARM is presented with an initial interest rate that is below the market rate for a fixed mortgage product.

This is in contrast to a fixed rate mortgage where the mortgage rates stays the same for the duration of the loan term. Fixed rate mortgages typically come in 15, 20 and 30 year increments. 

Why Would I Ever Choose an ARM?

ARM’s seem worrisome for some borrowers. Buying real estate can be an emotional and often stressful process so a fixed rate mortgage feels safer. However according to the Financial Samurai in 2022 the average home owner has been in their home for 10.5-13 years. In the early 2000’s homeowners typically stayed in the home for approximately 4-5 years. Still, according to the US Census Bureau, only 37% of Americans have lived in their home for more than 10 years. Even the post pandemic statistics confirm that an ARM is a beneficial mortgage solution for many borrowers.

What does this tell us? If you are reviewing your loan options you might consider how long you expect to stay in the home you are purchasing. If it is likely that you will move from the area or into a new home in 5 – 10 years after purchasing your home then an ARM might be a better choice. 

The Pros and Cons

Fixed Rate Mortgage – 

  • Set interest rate that will not change for the life of the loan.
  • No rate change surprises if the market changes drastically.
  • Consistent payment that is easier to budget for.
  • Can be harder to qualify for.
  • If interest rates decrease you can refinance into a new loan program to lower your rate.

Adjustable Rate Mortgage – 

  • Initial rate is set below fixed rate mortgages for upfront savings.
  • After the initial term, the rate will adjust with the market so it could go up or down.
  • Typically much cheaper than a fixed rate mortgage for the first 5-10 years.
  • Harder to budget for when the rate starts adjusting.
  • If interest rates decrease you can get the lower rate without refinancing.

There are benefits to both an ARM and a fixed rate mortgage. The decision becomes much clearer if you have set goals for homeownership and the property you are buying. Unless you’re buying your forever home an ARM is at the very least worth the consideration.

Learn the Lingo

When looking into ARMs it is helpful to have the basic knowledge on common terms that will be presented to you.

 – Adjustment Frequency: This will outline how often the rate will be subject to adjustment after the fixed term has concluded. Examples would be every 6 months or annual adjustments.

– Caps: An ARM will typically have some caps. There will be a cap on how much the interest rate can increase each adjustment period and there will be a cap on how much the interest rate can adjust over the life of the loan.

– Ceiling: This would refer to the maximum the interest rate would be allowed to adjust to over the life of the loan.

– Floor: This would refer to the minimum interest rate that would be allowed regardless of the rate market conditions.

Understanding these terms will give you a better idea of how your ARM will play out over the course of the loan and help you decide if you feel comfortable moving forward with this loan type.

Fixed Rate or ARM?

If you are considering what loan type to choose it’s best to sit down and make a rough outline of your vision for the property you are buying and discuss the options candidly with your loan officer. 

The biggest advantage of an ARM is the lower initial interest rate. If you plan to stay in the home long term you will want to check in on the interest rate market from time to time to determine if it might be a good time to refinance into a long term fixed rate. 

If you are buying a home while you attend college or medical school or if you have taken a temporary position with the goal to relocate in the future, an ARM may be the perfect choice for the time you’ll spend in the home. 

Contact your loan officer today to talk out all your options and our team will help you determine the best loan program for you.


If you are looking to buy a home in the current Upper Valley real estate market, you need a team of local real estate experts on your side. Our team is well versed in a variety of loan programs including fixed mortgages, ARMs, VA loans, FHA and more! We have the privilege of partnering with the best local agents, appraisers and attorney’s the Upper Valley has to offer. When you work with Legacy Mortgage you are working with the best local professionals from beginning to end. Reach out to the Legacy Mortgage team to get started get the loan process started. Call us today, 603-643-7400.