A 3/1 ARM is an adjustable-rate mortgage with an interest rate that stays fixed for the first three years. After that initial period, the rate can adjust once per year.
That gives a 3/1 ARM the shortest initial fixed-rate period among common 3/1, 5/1, 7/1 and 10/1 structures. The trade-off is that you reach the adjustable portion of the mortgage sooner.
3/1 ARM Basics
| Feature |
How a 3/1 ARM Works |
| Initial fixed-rate period |
3 years |
| First possible adjustment |
After the initial 3-year period |
| Adjustment frequency |
Once per year after the initial period |
| Adjusted rate |
Generally based on an index plus a margin, subject to the loan terms |
| Rate caps |
Limit how much the rate can change at the first adjustment, later adjustments and over the life of the loan |
| Principal-and-interest payment |
Can change after the initial period if the interest rate changes |
How a 3/1 ARM Works
The numbers in a 3/1 ARM describe the loan's interest-rate schedule. The “3” means the initial rate stays fixed for three years. The “1” means the rate can adjust once per year after that period ends.
During the first three years, the mortgage interest rate does not change. On a standard fully amortizing mortgage, the scheduled principal-and-interest payment generally remains stable during that period.
Your total monthly housing payment can still change if expenses such as property taxes, homeowners insurance, mortgage insurance or escrow requirements change.
After the initial period, the loan enters its adjustable phase. The rate can then change annually based on the loan's index, margin, rate caps and any applicable floor.
What Happens After 3 Years on a 3/1 ARM?
The first possible rate adjustment generally occurs after the initial three-year period ends.
An ARM's adjusted rate is typically calculated using a market-based index plus a margin. The index can move with market conditions, while the margin is established in the loan agreement and generally does not change after closing.
If the resulting rate is higher, your principal-and-interest payment can increase. If the index declines, the rate may decrease, depending on the mortgage's caps, floor and other terms.
The amount of any change is also limited by the rate caps written into the loan.
How Rate Caps Work on a 3/1 ARM
Rate caps set limits on how much an ARM's interest rate can change. Because a 3/1 ARM reaches its adjustable period after only three years, understanding those limits is especially useful when evaluating what the mortgage could cost later.
ARM rate caps generally fall into three categories:
- Initial adjustment cap: Limits how much the rate can change when the initial three-year period ends.
- Subsequent adjustment cap: Limits how much the rate can change at later annual adjustments.
- Lifetime adjustment cap: Limits the total rate change allowed over the life of the mortgage.
The specific cap structure depends on the loan. Review the terms in your mortgage disclosures rather than assuming every 3/1 ARM uses the same limits.
3/1 ARM vs. Other ARM Types
A 3/1 ARM reaches its first possible adjustment sooner than longer-period ARMs. The main structural difference among common /1 ARMs is how long the initial interest rate remains fixed.
| ARM Type |
Initial Fixed-Rate Period |
Adjustment Frequency After Initial Period |
| 3/1 ARM |
3 years |
Once per year |
| 5/1 ARM |
5 years |
Once per year |
| 7/1 ARM |
7 years |
Once per year |
| 10/1 ARM |
10 years |
Once per year |
A longer initial period gives you more time before the first possible adjustment. Actual pricing can also differ among ARM structures, so the shortest initial period should not automatically be treated as the least expensive option.
3/1 ARM vs. Fixed-Rate Mortgage
A 3/1 ARM keeps its interest rate fixed for only the first three years. A fixed-rate mortgage keeps the same interest rate for the entire loan term.
| Feature |
3/1 ARM |
Fixed-Rate Mortgage |
| Interest rate |
Fixed for 3 years, then adjustable |
Fixed for the loan term |
| First possible rate change |
After the initial 3-year period |
No scheduled rate adjustment |
| Principal-and-interest payment |
Can change after the initial period |
Does not change because of market interest rates |
| Rate caps |
Limit permitted adjustments |
Not applicable |
A 3/1 ARM does not automatically have a lower initial rate or payment than a fixed-rate mortgage. Compare the actual pricing and loan terms available to you.
Advantages and Disadvantages of a 3/1 ARM
Potential Advantages
- Initial three-year fixed period: The interest rate does not adjust during the first three years.
- Potential pricing difference: Depending on market conditions and lender pricing, a 3/1 ARM may be priced differently from longer-period ARMs or fixed-rate mortgages.
- Rates can move down: After the initial period, the adjusted rate may decrease if the underlying index falls, subject to the loan terms.
Potential Disadvantages
- Earlier adjustment risk: The first possible rate change comes after three years, sooner than with a 5/1, 7/1 or 10/1 ARM.
- Future payments are less predictable: Your principal-and-interest payment can increase if the adjusted rate rises.
- Plans can change: Selling or refinancing before the first adjustment is not guaranteed.
Who Might Consider a 3/1 ARM?
A 3/1 ARM may be worth comparing if a shorter initial fixed-rate period fits your expected timeline and you are comfortable with the possibility of rate and payment changes beginning after three years.
You might expect to move, refinance or pay off the mortgage before the adjustable period begins. Those expectations can be part of your comparison, but the loan should also be affordable if your plans change.
An ARM risk calculator can show how different rate changes could affect your principal-and-interest payment if you still have the mortgage after the initial period.
What to Compare Before Choosing a 3/1 ARM
The initial interest rate is only one part of an ARM. Two 3/1 ARMs can have different pricing, margins, caps and fees even though they follow the same basic three-year-and-annual-adjustment schedule.
Compare:
- The initial interest rate and APR
- The first adjustment date
- The index
- The margin
- The initial adjustment cap
- The subsequent adjustment cap
- The lifetime adjustment cap
- Any applicable interest-rate floor
- Points and lender fees
- The maximum possible principal-and-interest payment
An adjustable-rate Loan Estimate includes additional information showing how the rate and payment can change. Comparing those terms can give you a clearer picture of the loan beyond its initial payment.
Bottom Line
A 3/1 ARM has an interest rate that stays fixed for three years and can adjust once per year afterward. Its defining characteristic is how soon the adjustable period begins compared with longer-period ARMs.
Compare the actual interest rate, APR, index, margin, caps, fees and potential future payment before choosing between a 3/1 ARM and another mortgage structure.
Frequently Asked Questions
What Does 3/1 Mean in an ARM?
The “3” means the initial interest rate stays fixed for three years. The “1” means the rate can adjust once per year after that initial period.
What Happens After 3 Years on a 3/1 ARM?
The interest rate becomes eligible for annual adjustments. The adjusted rate is generally based on the loan's index plus margin, subject to rate caps and any applicable floor.
Can a 3/1 ARM Payment Go Up?
Yes. If the interest rate increases after the initial three-year period, the principal-and-interest payment can also increase. Rate caps limit how much the rate can change under the mortgage terms.
Can a 3/1 ARM Rate Go Down?
It can. If the underlying index declines, the adjusted rate may decrease, depending on the loan's margin, caps, floor and other terms.
Is a 3/1 ARM a 30-Year Mortgage?
The 3/1 designation describes the interest-rate schedule, not the total repayment term. A 3/1 ARM can have a longer repayment term, with the first three years fixed and the remaining period subject to annual adjustments.
What Is the Difference Between a 3/1 and 5/1 ARM?
A 3/1 ARM can first adjust after three years, while a 5/1 ARM can first adjust after five years. Both can adjust annually after their initial periods end.
Can You Refinance a 3/1 ARM Before It Adjusts?
Yes, if you qualify for a new mortgage. Refinancing replaces the existing loan and can involve closing costs, so future rates, loan terms and costs affect whether refinancing makes financial sense.
.jpg?quality=80&width=150)
