An adjustable-rate mortgage can be worth comparing when mortgage rates are high, but the decision depends on the actual loan offers available to you.
Some ARMs may offer a lower initial rate than comparable fixed-rate mortgages. That difference is not guaranteed, and an ARM introduces the possibility that your interest rate and principal-and-interest payment could change after the initial fixed-rate period.
The key is to compare both the initial cost and what could happen if you keep the mortgage long enough for the rate to adjust.
ARMs When Mortgage Rates Are High: Basics
| Factor |
What to Know |
| Initial interest rate |
May differ from fixed-rate pricing, but an ARM is not guaranteed to start lower |
| Initial fixed-rate period |
Determines how long the rate stays unchanged before adjustments can begin |
| Later adjustments |
Generally based on an index plus a margin, subject to the loan terms |
| Rate caps |
Limit how much the interest rate can change at the first adjustment, later adjustments and over the life of the loan |
| Refinancing |
May be possible before an adjustment, but future eligibility and rates are not guaranteed |
| Payment risk |
Principal and interest can increase after the initial fixed-rate period |
Why ARMs Get Attention When Mortgage Rates Are High
When fixed mortgage rates are elevated, borrowers may compare ARMs to see whether the available initial pricing is lower.
If an ARM does have a lower initial rate, that can reduce the principal-and-interest payment during the fixed-rate period. But the difference needs to be verified using actual loan offers rather than assumed based on the mortgage type.
That distinction is especially important because an adjustable-rate mortgage shifts some interest-rate uncertainty into the future. Once the initial period ends, the rate can change according to the loan terms.
A fixed-rate mortgage works differently. Its interest rate does not change during the loan term, so the trade-offs between an ARM and a fixed-rate mortgage extend beyond the initial payment.
How an ARM Can Change After the Initial Period
An ARM begins with an interest rate that stays fixed for a specified period. After that, the rate can adjust at scheduled intervals.
The adjusted rate is generally based on a market index plus a margin specified in the loan agreement. The index changes with broader market conditions, while the margin generally remains the same after closing.
Rate caps limit how much the interest rate can change:
- Initial adjustment cap: Limits the change when the initial fixed-rate period ends.
- Subsequent adjustment cap: Limits changes at later adjustments.
- Lifetime adjustment cap: Limits the total change allowed over the life of the mortgage.
The specific rate caps can vary from one ARM to another, even when two loans have the same initial interest rate.
What If Mortgage Rates Stay High?
An ARM does not require mortgage rates to fall. But if rates remain elevated when the initial period ends, the ARM's index could result in a higher adjusted rate, subject to the loan's caps.
That is why choosing an ARM solely because you expect rates to decline can create risk. Future mortgage rates, home values and your finances cannot be known when you take out the loan.
The same applies to plans to sell. Your expected ownership timeline can change, leaving you with the mortgage when its adjustable period begins.
Consider what the loan would look like if neither falling rates nor an early sale occurs.
ARM Types to Compare When Rates Are High
The initial fixed-rate period determines how long you have before the first possible adjustment. A longer period postpones that adjustment, while a shorter period reaches the adjustable phase sooner.
| ARM Type |
Initial Fixed-Rate Period |
Adjustment Frequency Afterward |
| 5/6 ARM |
5 years |
Every 6 months |
| 7/6 ARM |
7 years |
Every 6 months |
| 10/1 ARM |
10 years |
Once per year |
The longer initial period on a 7/6 ARM gives you two additional years before the first possible adjustment compared with a 5/6 ARM. The actual loan terms still matter when comparing 5/6 and 7/6 ARMs.
A 10/1 ARM delays its first possible adjustment for a full decade. A 5/1 and 10/1 ARM both adjust annually after their initial periods, but the 10/1 provides five additional years before that adjustable period begins.
A longer initial fixed-rate period does not automatically make one ARM less expensive or more appropriate. Compare the rate, APR, fees, margin, caps and potential future payment for the specific loans available to you.
Do Not Count on Refinancing Before Your ARM Adjusts
You can refinance an ARM before its initial fixed-rate period ends if you qualify for a new mortgage. But refinancing should not be treated as a guaranteed exit from the adjustable period.
Your ability to refinance later can depend on:
- Mortgage rates at the time
- Your credit profile
- Your income and debts
- Your home's value and available equity
- The mortgage programs and underwriting requirements available at that time
If refinancing does become appropriate, moving from an ARM to a fixed-rate mortgage can replace the adjustable structure with an interest rate that stays fixed for the new loan term.
Until then, evaluate the ARM based on the possibility that you may still have it when the first adjustment occurs.
How to Stress-Test an ARM
Looking only at the initial payment can understate the risk of an adjustable-rate mortgage.
Compare the payment during the initial period with what could happen after the loan begins adjusting. The CFPB recommends looking at the worst-case scenario when comparing ARM Loan Estimates.
Review:
- The initial interest rate and APR
- The payment during the fixed-rate period
- The first adjustment date
- The index and margin
- The initial, subsequent and lifetime rate caps
- Any applicable interest-rate floor
- The maximum possible principal-and-interest payment
- Points, lender fees and other closing costs
An ARM risk calculation can also illustrate how a higher adjusted rate could affect your principal-and-interest payment.
When a Fixed-Rate Mortgage May Be Worth Comparing
A fixed-rate mortgage removes the risk of future interest-rate adjustments on the existing loan. That can be particularly relevant if you expect to keep the mortgage beyond the ARM's initial period or if a future payment increase would put pressure on your budget.
The comparison should still use actual pricing. A fixed-rate mortgage is not automatically more expensive initially, just as an ARM is not automatically cheaper.
If the rate and payment difference between the two options is small, the potential benefit of taking on adjustment risk may also be small. If the ARM offers materially different pricing, compare that initial difference with the payment that could apply later.
Other Ways to Address a High Mortgage Rate
An ARM is not the only structure that can change the cost of a mortgage when rates are elevated.
Mortgage Points
With mortgage points, you pay an upfront cost in exchange for a lower interest rate. Whether the added closing cost pays off depends in part on how long you keep the mortgage.
Temporary Buydowns
A temporary mortgage buydown reduces the amount you are responsible for paying during an initial period through a funded subsidy. Unlike an ARM, the underlying note rate on a fixed-rate mortgage does not change when the temporary buydown ends.
That makes a temporary buydown structurally different from an ARM. The ARM introduces possible future rate adjustments, while the temporary buydown changes who funds part of the scheduled payment for a limited time.
Bottom Line
High mortgage rates alone are not a reason to choose an ARM. The relevant question is whether the actual ARM offer provides terms that justify taking on the possibility of future rate and payment changes.
Compare the ARM's initial rate and costs with fixed-rate alternatives, then review the adjustment schedule, index, margin, caps and maximum possible payment. The mortgage should remain manageable even if rates do not fall and you cannot refinance or sell before the adjustable period begins.
Frequently Asked Questions
Are ARMs Better When Mortgage Rates Are High?
Not necessarily. Some ARMs may offer different initial pricing than fixed-rate mortgages, but that depends on current lender pricing and your loan scenario. An ARM also carries the possibility of future rate and payment changes.
Do ARMs Always Start With Lower Rates Than Fixed-Rate Mortgages?
No. Many ARMs may start with lower rates than comparable fixed-rate mortgages, but that is not guaranteed. Compare the actual interest rates, APRs, fees and other loan terms available to you.
What Happens if Rates Are Still High When My ARM Adjusts?
If the loan's index is higher when an adjustment occurs, your interest rate and principal-and-interest payment may increase. The amount of the change is limited by the mortgage's applicable rate caps.
Can an ARM Rate Go Down if Mortgage Rates Fall?
It can. If the underlying index declines, the adjusted rate may also decrease, depending on the loan's margin, caps, any applicable floor and other terms.
Should You Get an ARM if You Plan to Refinance?
Your expected refinance timeline can be part of the comparison, but refinancing is not guaranteed. Future rates, home value, credit, income and underwriting requirements can all affect whether you qualify for a new loan.
Does a Longer ARM Fixed Period Reduce Risk?
A longer initial fixed-rate period delays the first possible adjustment. It does not eliminate adjustment risk if you keep the mortgage beyond that period, and longer-period ARMs can have different pricing and terms.
What Should You Compare Before Choosing an ARM?
Compare the interest rate, APR, fees, initial fixed-rate period, adjustment frequency, index, margin, rate caps, any applicable floor and maximum possible principal-and-interest payment.
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