Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) is a home loan with two phases. It starts off with a comparatively low, fixed interest rate for an introductory period (typically 5-10 years). In the second phase, the rate adjusts periodically based on market conditions (typically in 6 month or annual increments). If your life circumstances are fitting, these loans can help make homeownership and the benefits of equity more immediately affordable.
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An ARM May Be a Great Fit If You:
An ARM May Be a Great Fit If You:
- Intend to relocate, refinance or sell the home before the introductory period on the loan ends (5-10 years)
- Expect your income will grow in the next decade
- Can make extra initial principal payments to build your equity faster
See What an ARM Can Do for You
See What an ARM Can Do for You
Afford a home sooner with lower monthly payments for the first 5-10 years 
Pay less to finance your short-term residence 
Buy a home with as little as 5% down 
Turn your home equity into cash while maintaining an initial low monthly payment 
Lower your interest rate without refinancing should benchmark rates drop (after initial period) Ready to get started?
Types of Adjustable-Rate Mortgages
Fixed Period ARM Purchase
- Buy a home with as little as 5% down
- Choose a 5, 7 or 10-year low fixed-rate introductory period
- Avoid mortgage insurance once an 80% loan-to-value (LTV) is reached
- Opt for conventional or FHA (affects intro and adjustment periods)
- Homebuyers planning on relocating, refinancing or paying off their mortgage in the not-too-distant future
Fixed Period ARM Refinance
- Choose a low fixed-rate period of 5, 7 or 10 years
- Save significantly with low monthly payments during the initial phase
- Take advantage of timely interest savings under favorable market conditions
- Select conventional or FHA (affects intro and adjustment periods)
- Those inclined to keep watch for market opportunities
- Homeowners who can make extra principal payments during the initial phase
Fixed Period ARM Cash-Out Refinance
- Access your home equity while keeping an initial low monthly payment
- Use funds to renovate and increase your home’s value
- Save immediately every month by consolidating high-interest debt and eliminating bills
- Choose between conventional and FHA options (affects intro and adjustment periods)
- Tapping into your home equity with a comparatively low initial interest rate
- Paying off high-interest debt to lower monthly bills
- Making home improvements that may allow for a tax deduction*
Frequently asked questions about Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage, or ARM, is a home loan with two different phases. The first phase offers low payments at a fixed interest rate, which is usually lower than other current fixed-rate mortgage options. After the first phase ends, you continue paying off your loan at a rate that will adjust periodically according to the market, with built-in limits as to how much it can fluctuate.
These mortgages can offer significant savings and flexibility for homebuyers who are prepared to take advantage of their unique features.
Your rate won’t change arbitrarily. Instead, it will be based on two key components: the index and your loan’s margin.
The index is a gauge that is based on external market conditions, and it will change based on those market conditions. A commonly used benchmark for conventional ARMs is the SOFR Index Averages (published by the New York Federal Reserve), which is largely determined by the U.S. Federal Reserve’s target range for the federal funds rate. The benchmark used for government-backed ARMs (such as FHA or VA ARMs), is the Constant Maturity Treasury Index (CMT), which tends to initiate favorable adjustment periods for these loans.
Your loan’s margin is a percentage point added to the index by your lender. The index and your margin are combined to create the adjustable interest rate you will pay. This is why adjustable mortgage rates are often defined in terms like “SOFR + 2.75%” or “CMT + 1.75%.”
This means that any rate changes will be easy to understand and driven by market movements that will impact nearly all other financial products as well.
In addition to being tied to larger financial market changes after the introductory fixed period ends, ARM rates are also typically capped in several different ways:
- Initial adjustment cap: This limits how much the interest rate can increase the first time it adjusts after the fixed-rate phase of your loan ends.
- Subsequent adjustment cap: This limits how much the interest rate can increase during the subsequent adjustment periods that follow your first adjustment. This cap is usually around 1%, meaning that your new rate can’t rise more than one percentage point above your previous rate.
- Lifetime adjustment cap: This limits the total interest rate increases possible over the duration of your entire loan. This cap is usually around 5%, so your interest rate will never be more than five percentage points higher than your initial rate.
- Payment cap: This limits the amount that your monthly payment on an adjustable-rate mortgage loan can change, which would be tied to the maximum adjustments possible on rates.
- 10/6 ARM: This conventional ARM offers 10 years of low payments at a fixed interest rate. After 10 years, the interest rate on this loan will adjust bi-annually (every six months).
- 7/6 ARM: This loan is the most popular conventional ARM choice, which offers seven years of low payments at a fixed interest rate. After seven years, the interest rate on this loan will adjust bi-annually (every six months).
- 5/6 ARM: This conventional ARM offers five years of low payments at a fixed interest rate. After five years, the interest rate on this loan will adjust bi-annually (every six months).
- 5/1 ARM: This structure is offered for government-backed ARMs — both FHA and VA — and provides five years of low fixed-rate payments that will adjust annually (hence the “1,” representing one year) with rate caps of 1/1/5. Here’s a detailed breakdown of the rate caps for this example:
- 1 (Initial Adjustment Cap): This is the maximum amount your interest rate can increase the first time it adjusts after the initial five-year fixed period ends. In this case, your rate cannot increase by more than 1 percentage point. For example, if your initial interest rate was 4%, the highest it could go in the sixth year is 5%.
- 1 (Periodic Adjustment Cap): This cap limits how much the interest rate can increase in each subsequent adjustment period. For a 5/1 ARM, this means your rate can't go up by more than 1 percentage point each year after that first adjustment. Using our example, in the seventh year, the rate could not exceed 6% (5% from the previous year + 1%).
- 5 (Lifetime Cap): This is the maximum your interest rate can ever increase over the entire life of the loan from your initial rate. Your interest rate can never be more than 5 percentage points higher than your starting rate. So, if your initial rate was 4%, it will never go above 9%, no matter how high market rates get.
A Pennymac Loan Expert can help you figure out if an ARM is right for you, and if so, which one you would most likely benefit from. The basis of those determinations would include your future plans for your home, career and other personal and global financial considerations.
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