Interest-only loans can give you even lower starting monthly payments than typical ARMs. But your monthly payments will go up once principal payments and rate adjustments kick in. Here’s a comparison of ARM loan payments against the two most popular types of fixed-rate mortgages, with all other things being equal, assuming an adjustment to the maximum payment cap. I’ve covered mortgages, real estate and personal finance since 2020.

Compare current ARM rates versus other loan types

A 3-Year ARM mortgage can offer initial affordability and flexibility, yet it demands careful consideration and planning. Understanding its features, advantages, and potential risks is crucial for borrowers aiming to leverage this mortgage option effectively. Generally, the initial interest rate on an ARM mortgage is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates — and your monthly payments — can rise or fall.

Today’s 3/1 ARM Mortgage Rates

Apply with a few mortgage lenders and see who offers the lowest rate for that type. The intro rate on a 3/1 ARM should be lower than the rate on a 5/1 ARM due to its shorter introductory period. If you’re 3 year arm rates buying a house, keep in mind that you might have to pay a real estate title transfer tax in addition to property taxes. If you decide to sell your home later on, doing so could increase your tax bill.

What is an adjustable-rate mortgage (ARM)?

In addition, those with a mortgage worth more than $750,000 cannot claim the deduction. If your margin is 2 percentage points and the SOFR is 0.15%, then your interest rate would be 2.15%. Reina Marszalek has over 10 years of experience in personal finance and is a senior mortgage editor at Credible. If a personal loan isn’t right for you, you might consider one of the following alternatives.

Do ARM rates ever go down?

That’s about $96 more a month, and when compared with your monthly payment for a 30-year fixed-rate mortgage, it’s $2,940 more a year. That difference could impact you financially, especially if your budget is tight. It’s something to keep in mind as you check your finances before deciding on a mortgage. Every time your lender adjusts your interest rate, they’ll also recalculate the mortgage payment so you pay off the loan by the end of your term. 3-year ARMs, like other ARM loans, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise.

Editorial integrity

If you’re buying your forever home, think carefully about whether an ARM is right for you. But at the conclusion of the initial fixed-rate period, ARM rates begin to adjust until the loan is refinanced or paid in full. These rate adjustments follow a set schedule, with most ARM rates adjusting once per year.

Is an adjustable-rate mortgage right for you?

An adjustable-rate mortgage, or ARM, is a home loan that has an initial, low fixed-rate period of several years. After that, for the remainder of the loan term, the interest rate resets at regular intervals. The caps on your adjustable-rate mortgage are the first line of defense against massive increases in your monthly payment during the adjustment period. They come in handy, especially when rates rise rapidly — as they have the past year. The graphic below shows how rate caps would prevent your rate from doubling if your 3.5% start rate was ready to adjust in June 2023 on a $350,000 loan amount. With this type of mortgage, the actual indexed rate is fixed for the first three years of the loan, and then adjusts every year thereafter, a sort of hybrid between a fixed rate and an adjustable rate.

Interest-only ARM loans

The most common initial fixed-rate periods are three, five, seven and 10 years. Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months. The best way to get an idea of how an ARM can adjust is to follow the life of an ARM.

Fixed-rate vs. adjustable-rate mortgages

Instead of refinancing from an adjustable-rate mortgage to a fixed-rate, they’ll refinance to an ARM, such as a 3/1 ARM. It might be a good move for short-term lower interest rates if you plan on moving in a few years. But if you’re refinancing and you want to stay in your house for the remainder of your loan term, getting a 3/1 ARM might not make sense. It’s important to run the numbers to see both the costs and the potential savings of either option. An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change at regular intervals following an initial fixed period. With a 3/1 ARM, the initial interest rate remains fixed for three years.

Current ARM mortgage rates: Are they lower than fixed rates?

• 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.
• Before the 2008 housing crash, lenders offered payment option ARMs, giving borrowers several options for how they pay their loans.
• As mentioned above, a hybrid ARM is a mortgage that starts out with a fixed rate and converts to an adjustable-rate mortgage for the remainder of the loan term.
• If no results are shown or you would like to compare the rates against other introductory periods you can use the products menu to select rates on loans that reset after 1, 5, 7 or 10 years.
• Still, that low rate equates to lower mortgage payments for the first three to 10 years of your mortgage loan.
• It’s common for homeowners to refinance into a fixed-rate mortgage before their ARM’s first adjustment.

If you chose a 3/1 ARM with 6.63% rate, you’d pay roughly $1,153 per month in mortgage interest and principal. A 30-year fixed-rate mortgage at 5.34% would cost you roughly $1,004 per month. Lenders offer homebuyers who want 3/1 ARMs an initial interest rate for three years.

The choices included a principal and interest payment, an interest-only payment or a minimum or “limited” payment. You may prefer the 3-year ARM if you want to take advantage of lower initial interest rates and save money at the start of your loan term. During the introductory period, ARM rates are typically lower than their fixed-rate counterparts.

Bankrate logo

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.

• If you claim the mortgage interest deduction with a 3/1 ARM, don’t be surprised if your tax savings are relatively low, at least for the first three years of your loan term.
• Once that three-year period is up, your rate adjusts on an annual basis.
• But if you’re refinancing and you want to stay in your house for the remainder of your loan term, getting a 3/1 ARM might not make sense.
• So after the 5-year fixed-rate period, your rate can adjust once per year for the next 25 years, or until you refinance or sell the home.
• The APR includes both the interest rate and lender fees for a more realistic value comparison.

Why Choose loanDepot?

Whether you’re just comparing 3 year ARM rates or ready to get started on a mortgage, we can help make the process of refinancing or buying a home fast and easy. The index rate can change, but the margin stays the same each time the rate resets. There are also limits — or caps — to how much the interest rate can increase. ARM loan guidelines require a 5% minimum down payment, compared to the 3% minimum for fixed-rate conventional loans. In contrast to a 3/1 ARM, a fixed-rate mortgage keeps the same interest rate for the life of the loan. If you choose a 30-year fixed-rate mortgage, for example, your interest rate won’t change for those 30 years.

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.

1 vs 10/1 ARM rates

But if the rate increases, your monthly mortgage payments will also rise. A 3/1 ARM can be a good idea if you plan to refinance your home before the fixed period expires. Low initial rates can translate to lower monthly payments during the first few years of your mortgage. With a fixed-rate mortgage, you’ll have consistent, predictable monthly payments throughout the life of your loan. A 3-year ARM has a fixed “teaser” interest rate for the first three years of the loan. After that, the interest rate adjusts on a recurring schedule, typically every six months.

• To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors.
• ARM rates are more complicated than those of fixed-rate mortgages, so shopping for them is a little different also.
• Once that three-year period is up, your rate adjusts on an annual basis.
• APRs and rates are based on no existing relationship or automatic payments.
• The APR includes both the interest rate and lender fees for a more realistic value comparison.

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.

Adjustable-rate mortgages, or ARMs, have been largely ignored for years. Borrowers who buy or move in the near future could enjoy an ARM’s low rates and lower monthly payments. If you have a fixed-rate mortgage, such as a 30-year fixed-rate home loan, your interest rate and mortgage payment will always remain the same. But if you have a hybrid mortgage loan like a 3/1 ARM, your mortgage payments could drastically change every year once the three-year introductory period is over. An adjustable-rate mortgage makes sense if you have time-sensitive goals that include selling your home or refinancing your mortgage before the initial rate period ends.

This is because shorter introductory periods reduce a lender’s risk if rates unexpectedly rise. If you’re not sure whether you can pay for extra interest when the mortgage rate adjusts after three years, you might be better off refinancing and getting another fixed-rate home loan. When it comes to buying a home, cash is king to keep your monthly payments lower. If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance. Plus, you might not get the best interest rate since you’ll need a bigger mortgage and the lender will have more to lose if you default.

However, some borrowers who had 3/1 ARMs in the past may still be paying them off.

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.

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.

Oftentimes, lenders check your ARM eligibility based on the loan’s fully-indexed rate, which is the highest it could go after adjusting. This protects you as a borrower because it helps ensure you can afford your payments if the rate increases later on. But it also means you don’t get the benefit of qualifying at the ultra-low intro rate. Lenders typically use the fully-indexed rate to qualify you for an ARM loan, rather than the lower intro rate. This helps ensure that you’ll be able to afford your home loan even if your rate adjusts upward after its fixed period expires. In this way, an adjustable-rate mortgage works differently than one with a fixed interest rate.

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.

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.

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.

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.