What Is A 3 1 Adjustable-Rate Mortgage ARM?

With a hybrid loan the principle is being amortized over the entire life of the loan, including the initial three year period. This is generally the safer type of 3-year ARM for most people, since there is no potential for negative amortization. Generally the rates on these loans are slightly higher than other 3-year loans, since there is less potential profit to the lender. The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary.

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After this fixed period, the rate becomes variable, changing once per year. The first adjustment is capped at 5%, limiting the increase in the interest rate and reducing the risk of payment shock. The margin acts as the floor, meaning the interest rate can never be lower than 3%, no matter how much the index rate decreases.

Conforming loans

With a 3-year adjustable-rate mortgage, you could get in over your head if your rate adjusts too high. Hybrid mortgages, like a 3/1 ARM, provide a variety of benefits, but come also with downsides. The advantage is that borrowers initially have access to mortgage rates that are usually lower than the ones available to people interested in 15-year or 30-year fixed-rate mortgages. However, 3/1 ARMs can be considered risky home loans because homeowners don’t know exactly how their interest rate will change after the initial fixed-rate period ends. When you get a mortgage, you can choose a fixed interest rate or one that changes.

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During periods of higher rates, ARMs can help you save money in the early days of your loan by securing a lower initial rate. Just keep in mind that after the introductory period of the loan, the rate — and your monthly payment — might go up. When shopping for a 3 year mortgage rate, the initial rate should be of less concern than other factors. The margin amount, the caps, the maximum lender fees and the potential for negative amortization and payment shock should all weigh more in your decision than the initial rate.

Pros and cons of personal loans

Generally, the longer the I-O period, the higher the monthly payments will be after the I-O period ends. These loans are generally priced more attractively initially, because there is more potential profit for the lender. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.

• Yes, you always have the option to refinance an ARM into a fixed-rate loan — as long as you can qualify based on your credit, income and debt.
• These are ARMs that allow you to convert your balance to a fixed rate, usually for a fee.
• The loan starts with a fixed interest rate for a few years (usually three to 10), and then the rate adjusts up or down on a preset schedule, such as once per year.
• Some types of 3-year mortgages have the potential for negative amortization.
• Once these teaser rates expire, the ARM will reset and be subject to interest rate adjustments for the remaining 25 or 27 years of the 30-year mortgage.
• A 7-year Adjustable Rate Mortgage (ARM) is a home loan with an interest rate that stays the same for the first seven years, followed by adjustments every six months.
• In contrast to a 3/1 ARM, a fixed-rate mortgage keeps the same interest rate for the life of the loan.

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In addition to regular rate resets, these loans typical get recast every 5 years or whenever a maximum negative amortization limit of 110% to 125% of the initial loan amount is reached. Teaser rates on a 3-year mortgage are higher than rates on 1-year ARMs, but they’re generally lower than rates on a 5 or 7-year ARM or a fixed rate mortgage. I’ve covered the housing market, mortgages and real estate for the past 12 years. At Bankrate, my areas of focus include first-time homebuyers and mortgage rate trends, and I’m especially interested in the housing needs of baby boomers. In the past, I’ve reported on market indicators like home sales and supply, as well as the real estate brokerage business. My work has been recognized by the National Association of Real Estate Editors.

Do ARM rates ever go down?

Then, it can change in one-year intervals for the rest of the loan term. It’s common for homeowners to refinance into a fixed-rate mortgage before their ARM’s first adjustment. That way, they never have to deal with the risk of expensive rate adjustments and can enjoy stable payments over the life of the loan. If you plan to move and sell your home before your adjustable rate kicks in, a 3-year ARM can save you money with low monthly payments.

1 vs 7/1 ARM rates

The Federal Reserve has started to taper their bond buying program. Calculate 3/1 ARMs or compare fixed, adjustable & interest-only loans side by side. Understand, however, that lenders qualify ARM borrowers differently than they do fixed-rate borrowers. LoanDepot’s easy-to-use calculator puts you in charge of estimating your mortgage payment. ARMs are often tied to mortgage index rates such as the London Interbank Offered Rate (LIBOR), which is the most common benchmark that banks around the globe use to set short-term interest rates.

Margin

Your specific interest rate will depend on several different factors, from your lender to your credit score to your down payment. Once that three-year period is up, your rate adjusts on an annual basis. The lender can adjust it up or down based on the performance of the index tied to your mortgage, plus a margin set by the lender. The interest rate is fixed for three years, then adjusts annually for the following 27 years. The offers that appear on this site are from companies that compensate us.

Compare ARM rates

3-year ARM interest rates are based on the SOFR (Secured Overnight Financing Rate), so they change every day. For today, Monday, January 06, 2025, the national average 5/1 ARM interest rate is 6.53%, flat compared to last week’s of 6.53%. The national average 3/1 arm rates today 5/1 ARM refinance interest rate is 6.41%, down compared to last week’s of 6.42%. Knowing what type of mortgage you’re getting can be a challenge, since so many things that sound like a good idea are often the things that can cost you the most money.

What is an adjustable-rate mortgage (ARM)?

• Talk to a mortgage lender about your home buying plans and find out if a low-rate ARM is the right decision for you.
• This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires.
• If you chose a 3/1 ARM with 6.63% rate, you’d pay roughly $1,153 per month in mortgage interest and principal.
• It also assumes you’d keep that rate for the remaining 27 years of its term.
• Borrowers who plan to move, upgrade, or downsize within 5 to 10 years often benefit from ARMs.
• It’s important to run the numbers to see both the costs and the potential savings of either option.
• With a fixed-rate mortgage, you’ll have consistent, predictable monthly payments throughout the life of your loan.
• While our priority is editorial integrity, these pages may contain references to products from our partners.

Bankrate has helped people make smarter financial decisions for 40+ years. Our mortgage rate tables allow users to easily compare offers from trusted lenders and get personalized quotes in under 2 minutes. While our priority is editorial integrity, these pages may contain references to products from our partners. Your payments may fluctuate every 6 months based on the current loan balance, new interest rate, and remaining loan term. However, if you’re going to stay in your home for decades, an ARM can be risky. If you don’t refinance, your mortgage payments may rise significantly once the fixed-rate period ends.

Frequently asked questions about 3-year ARM

To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors. Bankrate has reviewed and partners with these lenders, and the two lenders shown first have the highest combined Bankrate Score and customer ratings. You can use the drop downs to explore beyond these lenders and find the best option for you. For instance, if you expect to own your house for only three to five years, look at 3/1 and 5/1 ARMs. But if you’re unsure how long you plan to stay in the home, a 7/1 or 10/1 ARM might be a safer choice.

How do ARM loan rates work?

For instance, the APR calculation for a 3/1 ARM assumes that after the first three years, the loan increases to its fully-indexed rate, or rises as high as it’s allowed to under the loan’s terms. It also assumes you’d keep that rate for the remaining 27 years of its term. ARM rates are more complicated than those of fixed-rate mortgages, so shopping for them is a little different also. The 10/1 ARM gives you a low fixed rate for a decade and 20 potential rate adjustments, while a 5/1 ARM only locks your interest rate for five years and has 25 potential rate adjustments. The interest rate on any ARM is tied to an index rate, often the Secured Overnight Financing Rate (SOFR).

• With a hybrid loan the principle is being amortized over the entire life of the loan, including the initial three year period.
• If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments.
• Generally, the longer the introductory period, the higher the interest rate will be during that window.
• In analyzing different 3-year mortgages, you might wonder which index is better.
• In order for this to happen, mortgage rates would need to drop, bringing the index used to calculate your ARM’s rate down in tandem.

And since you’ll pay off your current mortgage when you sell, you won’t have to worry about higher ratesand payment amounts. The table below is updated daily with 3-year ARM rates for the most common types of home loans. Compare week-over-week changes to current adjustable-rate mortgages and annual percentage rates (APR). The APR includes both the interest rate and lender fees for a more realistic value comparison. ARMs come with rate caps that insulate you from possible steep year-to-year increases in monthly payments.

Not having a prepayment penalty allows you to pay off your mortgage early if you are ever able. Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky-high rates. These caps limit how much interest rates can increase once interest rates adjust. There are interest rate caps that limit how high interest rates can climb each year as well as ones that prevent interest rates from rising too much over the course of the entire loan term.

Is an adjustable rate a bad idea?

• After 36 months have passed, the homebuyer’s initial rate becomes a fully indexed interest rate that’s equal to a changing index rate plus a margin, which is a fixed percentage.
• In addition, many borrowers move or refinance before the ARM fixed-rate period is up and never have to pay the higher payments that come with a fully-indexed rate.
• For example, a 3/1 ARM will likely come with a lower introductory rate than a 7/1 ARM.
• However, 3/1 ARMs can be considered risky home loans because homeowners don’t know exactly how their interest rate will change after the initial fixed-rate period ends.
• You can use the savings to pay off your mortgage faster and build home equity.
• The following graph is for a 5/1 ARM, but it does a good job of showing how payments can change over time.

Generally, the longer the introductory period, the higher the interest rate will be during that window. For example, a 3/1 ARM will likely come with a lower introductory rate than a 7/1 ARM. Borrowers who plan to move, upgrade, or downsize within 5 to 10 years often benefit from ARMs. For instance, a family expecting to relocate in 6 years could use a 7/6 ARM to secure a lower rate without worrying about future adjustments. The lender sets the margin, which doesn’t change for the life of the loan. There are a few factors that go into setting an ARM’s variable rate, so it’s important to understand what they are.

But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. I’ve been writing and editing stories in the personal finance sphere for two decades, for publications like Business Week and Investopedia, covering everything from entrepreneurs to taxes. When compared to other types of mortgages, ARMs typically have stricter requirements. That’s because lenders need to consider your ability to repay the loan if your rate moves higher. If you found this guide helpful you may want to consider reading our comprehensive guide to adjustable-rate mortgages.

Though 3-year loans are all lumped together under the term „three year loan” or „3/1 ARM” there are, in truth, more than one type of loan under this heading. Understanding which of these types are available could save your wallet some grief in the future. Some types of 3-year mortgages have the potential for negative amortization. This table does not include all companies or all available products. The 7-year ARM rate can increase by up to 5% at the first adjustment and up to 1% at subsequent adjustments.

The ARM’s rate can then rise, fall or stay the same, depending on the movements of the broader market. A 3-year adjustable-rate mortgage functions a lot like any other ARM. The main differentiator with these loans is the length of the introductory period, during which the interest rate stays fixed.

If you do that, you can pretty much shop for the ARM in the same way that you’d compare fixed-rate home loans. This loan type offers lower introductory rates and payments but still comes with the security of a fully-amortized schedule that starts paying down your loan balance from day one. The “fully-indexed rate” on an ARM is the highest rate your loan has the potential to reach when it adjusts. Lenders set an ARM rate cap that determines how high your fully-indexed rate could go if interest rates were to rise substantially. Your margin will be set by several factors such as your credit score and credit history, the lender’s standard margin, and broader real estate market conditions.

A 3-year ARM gives you a fixed interest rate for the first three years of your loan. After that, your rate adjusts regularly for the remaining 27 years of your mortgage. Refinancing gives you a chance to take advantage of low monthly payments now and predictable payments later (after you refinance). With a 3-year ARM, you’ll enjoy low monthly payments for the first three years, but then you’ll have unpredictable — likely, higher — bills every 6–12 months.