Guide to Finding the Best 5/1 ARM, 5-Year, 7-Year Adjustable Rate Mortgages and Rates
Buying a house is one of the most exciting things you do in your lifetime, but it can also be one of the most stressful.
There seem to be endless important decisions you have to make in order to buy and mortgage your new home. One of those questions is: should I get an adjustable rate mortgage (ARM)?
This guide will serve in two ways: to answer your questions about adjustable mortgage rates and to show you how to find the best ARM mortgage rates you possibly can. We will answer questions such as:
- What is an adjustable rate mortgage?
- How does an ARM mortgage work?
- How do I go about finding the best 5/1 ARM rates or 7 year ARM rates (or more)?
- What’s the difference between a 5 year ARM and a 7 year ARM?
- What do 5/1 ARM rates look like when it comes to my finances?
- Does my credit score affect my ARM mortgage rates?
All these questions and more will be answered to help you decide if an adjustable rate mortgage is for you – and if it is, how to get the best rates to set up you financial future for success.
What Is an Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage (ARM) is a mortgage loan you take out on your home. What sets it apart is one factor: your payment can go up and down throughout the life of your mortgage.
Image Source: Top Adjustable Rate Mortgages
The opposite of an ARM mortgage is a fixed rate mortgage. When you have a fixed rate mortgage (often a 30-year fixed rate), you will have the exact same payment each and every month for the life of your mortgage.
The benefit of choosing an adjustable rate mortgage over a fixed loan is that the initial introductory ARM mortgage rates tend to be quite low, lower than any fixed loan rates. We will get into introductory rates below.
How Do ARM Rates Work?
Since an ARM adjusts throughout the life of your mortgage, it is important to look into how that works. While you can find many variations of ARM rates, we are going to focus on two of the most popular: 5-year ARM rates and 7-year ARM rates.
To give confidence about your ARM loan, lenders will offer you a fixed interest rate for a certain number of years.
For example, 5-year ARM rates (also written as 5/1 ARM rates), will provide you a low, fixed interest rate for those five years. This is your introductory rate. Your introductory fixed rate for a 7-year ARM will stand for seven years.
After the five or seven years, your mortgage interest rate can lower; however, it can also rise. This may feel like a gamble – and in many ways, it is – but your lender does not have a free-for-all when it comes to adjustable mortgage rates.
There are two factors that keep your ARM in check:
Understanding Indexes and Margins
Your lender will choose an index to control its interest rate policy on your adjustable rate mortgage. These index rates come from a third party and help prevent you from being taken advantage of.
When you sign up for an ARM loan, the lender will inform you which index they are using as a guide. Then they will also inform you of the margin they use. For example, if the index interest rate is at 1.875% and the lender’s margin is 2%, you will end up with a 3.875% interest rate.
The index’s interest rate can change at anytime, meaning your monthly payment can change at any time. However, the lender’s margin should stay the same throughout the life of your ARM mortgage.
All-in-One Change Management Tools
Top Rated Toolkit for Change Managers.
Get Your Change Management Tool Today...
How to Find the Best ARM Rates
Now that we understand the basics of an ARM loan, it is time to focus on how to find the best adjustable mortgage rates for you. Once again, remember that there are multiple options, but this article will pay attention to 5-year ARM rates and 7-year ARM rates.
Image Source: Adjustable Rate Mortgages and Rates
If you are going to choose an adjustable rate mortgage to pay for your new home, we know you want to get the best rates you possibly can – after all, this will greatly affect your monthly payments and interest costs.
We have gathered five steps to take in order to get the best ARM mortgage rates if you are looking for a 5-year ARM or 7-year ARM.
Know Your Future Plans and Goals
The first and most important step in choosing an adjustable rate mortgage is to have an idea about your future plans and goals relating to your home and your mortgage.
If you know these two things, for example, you may be more apt to get your ARM mortgage.
- Selling Soon: Say you get a 7-year ARM. Your introductory 7-year ARM rates will stay very low for that full seven years. If you know that you are planning on moving in five to six years, you have no fear about your ARM rates skyrocketing after seven years.
- Confident Budget: Those who are not living paycheck to paycheck can more easily take the risk of a heightened monthly payment if your 5/1 ARM rates go up after the first five years. You are more willing to gamble on the interest rates after the introductory 5-yr. ARM rates are gone.
Choose Your Introductory Rate Length
Your next step after deciding that your future is conducive to an ARM loan is to choose your introductory rate length. There are low rates, such as 3- or 5-yr. ARM rates. Then, there are also higher rates, such as 7-year ARM rates and even 10-year rates. There are pros and cons for each.
The fewer years you keep your introductory rate, the lower the rate you receive. For example, with 5/1 ARM rates you will get a lower rate than with a 7-year ARM, but you are only guaranteed that rate for five years. That is a pretty short amount of time compared to the length of your loan.
If you keep you introductory rate for longer than the 5-year ARM rates, like with 7-year ARM rates (or even a 10/1 ARM), you will pay a little more, but you have the confidence of keeping that rate for longer.
Making the choice between 5-year ARM rates or 7-year ARM rates may seem like a negligible difference, but it can, in fact, dramatically change your monthly payments if the market changes. It may be best to discuss this with your financial advisor.
Shop Around for the Right Lender
Now once you have decided that an ARM mortgage plan is for you, you will need to shop around for the right lender offering the best 5-year ARM rates or 7-year ARM rates (or even 10 years). This step is crucial in determining the best ARM mortgage rates.
- Bankrate: Compare various adjustable mortgage rates from various lenders in your particular area through Bankrate’s “Compare Mortgages” tool. You can look for 5/1 ARM rates at the same time you look at 7-year ARM rates (as well as 3/1 and 10/1 ARM rates). You can also take a peek at fixed loans for comparison.
- NerdWallet: Use NerdWallet’s “Today’s Mortgage Rates and Home Loans” tool to see what lenders are offering for a 5-year ARM and 7-year ARM. You can also read reviews and see your estimated monthly payment. By putting in your zip code, you will be able to see tailored rate estimates based on your exact specifications.
- Individual Bank Websites: When you are in the process of researching lenders, sometimes it is a good idea to go directly to a bank’s website to see their current ARM rates. For example, if you visit Chase’s website, they will give you updated 5/1 ARM rates as well as 7 year ARM rates. U.S. Bank will not only give you the rates; they also provide an estimated monthly payment through their calculator.
- AdvisoryHQ: Take a peek at our list of Top 5 Online Mortgage Lenders if you would rather try getting your ARM through an online lender.
Boost Your Credit Score
One important step to getting the best rates on your adjustable rate mortgage is to boost your credit score. With a low credit score comes a higher rates.
To give you a clear example of how important a higher credit score is to the ARM rates you could receive, we did a sample search comparison through Bankrate. We did two separate ARM mortgage rate searches and kept all of the details the same except the credit score.
- Loan Purpose: Purchase
- Location: Boston, MA
- Loan Amount: $320,000
- Percentage Down: 20%
- Product: 5/1 ARM rates
- Points: 0
For one search, we put a credit score of 740+, and for the next search we did a credit score between 680 and 699 (not even that much lower than the first sample).
- First Internet Bank: 2.875% rate for higher credit; 3.375% rate for low credit
- Consumer Direct Mortgage: 3.000% rate for higher credit; 3.875% rate for low credit
As you can see, with a slight credit increase, you can save significant money each month on your adjustable mortgage rates.
Avoid Paying Points
Paying points is a system of paying a bit extra money on your mortgage upfront in order to lower your interest rate. You may think of this as a great idea for your adjustable rate mortgage, but it is not necessarily a great way to get the best rates today.
The points that you are paying for when it comes to a fixed-rate mortgage will last you for the life of the entire mortgage. However, the points that you pay for when it comes to an ARM only last for the introductory rate period. If you choose a 5-year ARM, you get that discount for five years.
Because it can take much time to break even on saving money from this point system, a short introductory phase, like one that comes from 5-yr. ARM rates, may not actually save you money in the long run.
Is an ARM Loan for You?
We have shown you all the details on an ARM and provided a few hints for getting the best ARM rates, but now it is time to determine whether or not an ARM mortgage is for you.
Look into all your options for 5-year ARM rates and 7-year ARM rates, know your down payment, take a peek at your credit score, and then speak to a financial advisor about which option would fit your financial needs the best.
The five steps above will be the key for getting the best ARM mortgage rates for your mortgage loan this year.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.