ARM Refinance Rates

Refinancing your home is beneficial for many reasons, but in many cases, a refi is done to give the homeowner a bit of breathing room in the monthly budget. If you’re finding yourself panicked or stressed about the time the monthly mortgage payment is due, and an ARM refinance can help.

With ARM loans, the rates start out low for a fixed period of time and then adjust once per year due to ebbs and flows in the economy. ARM loans can be tricky, though, and could end up costing you more when rates increase.

To capitalize on the best ARM refinance rates, you have to consider your location and the market trends, as well as what is best for you, your family and your pocketbook.

In this article

    Current ARM refinance rates

    According to Bankrate’s latest survey of the nation’s largest mortgage lenders, these are the current refinance average rates for a 30-year, 15-year fixed and 5/1 adjustable-rate mortgage (ARM) refinance rates among others.

    Product Interest Rate APR
    30-Year Refinance Rate3.080%3.280%
    30-Year FHA Refinance Rate2.900%3.670%
    30-Year VA Refinance Rate2.800%2.990%
    30-Year Jumbo Refinance Rate3.110%3.170%
    20-Year Fixed Refinance Rate2.960%3.200%
    15-Year Fixed Refinance Rate2.520%2.730%
    15-Year Jumbo Refinance Rate2.510%2.550%
    10/1 ARM Refinance Rate3.120%3.950%
    5/1 ARM Refinance Rate3.120%4.090%
    5/1 ARM Jumbo Refinance Rate2.890%4.030%
    7/1 ARM Refinance Rate2.980%3.970%
    7/1 ARM Refinance Jumbo Rate2.940%3.930%

    Rates data as of 11/27/2020

    What is an ARM loan? 

    ARM stands for adjustable-rate mortgage. It refers to the type of home loan that starts with a low, fixed interest rate followed by a variable rate that can change once per year after. Another term for ARM loans is variable-rate mortgages or floating mortgages.

    The interest rate you’ll get during the variable term of your ARM is based on a benchmark and an ARM margin. The margin is based on the dollar amount of interest a borrower must pay on an ARM loan. 

    [ Read: 7 Ways to Get the Best Refinance Rates ]

    What are the different types of ARM loans?

    The different types of ARM loans include a 5/1 loan, a 7/1 loan and a 10/1 loan.

    5/1 ARM loan: AA loan with an initial fixed rate of five years, followed by a rate change once a year.

    7/1 ARM loan: A loan with a fixed interest rate for the first seven years, followed by a rate change yearly.

    10/1 ARM loan: As with the other two types, the interest rate holds steady for 10 years, after which your lender can adjust the interest rate each year based on market conditions and the ARM margin.

    What are the requirements for ARM loans? 

    Most of the best ARM loans and refinance rates are attainable with a credit score of 740 or better. It is good practice to check your credit score a few times a year. Work on improving your score as much as possible and carefully weigh any other credit cards or small loans that could damage it.

    The value of your home significantly impacts your ARM loan, whether you’re looking to buy or refinance. An appraisal, combined with the average price of homes in your area, determines how much of a risk it is to your lender.

    [ More: What Is an Interest-Only Mortgage? ]

    Finally, a down payment of 5% or more is critical. If the down payment is less than 20%, then mortgage insurance will probably be required. Your loan officer can go over financials to determine what option is best for your fiscal future.

    When should you consider an ARM loan? 

    Refinancing to an ARM loan is something to consider if you aren’t planning to stay in your home for the long haul. You’ll get a low interest rate upfront and can sell before you run the risk of variable interest.

    You can also think about refinancing to an ARM loan if you are expecting a significant change in household income. The lower interest rates on ARMs mean less pressure for now as you work to change income levels. The wiggle room buys you, almost literally, time to save.

    You should not consider an ARM if your income is unpredictable. In this case, a fixed-rate will help you plan your budget better.

    If you are on target for paying your mortgage off early, then an ARM loan is not for you. Extra payments on the principal owed on a fixed-rate mortgage don’t change the costs, but they do reduce the term – unlike ARM. And unless you have a chunk of change set aside, the refinancing costs may not make it worth the money. Fees, appraisals, title searches, and title insurance can add 5% or more to the amount you are looking to refinancing.

    Understanding important terms 

    Rate caps control how your interest rates adjust. There are three kinds:

    1. Lifetime adjustment cap: This rate cap says how much the interest rate can increase over the life of the loan. 
    2. Initial adjustment cap: After the fixed term reaches its end, and the loan adjusts for the first time, the initial adjustment cap dictates how much the interest rate can increase the first time.
    3. Subsequent adjustment cap: After the initial adjustment cap, the following adjustment cap dictates how much the interest rate can go up in the adjustment time that follows.  

    [ Related: Tips for Getting a Mortgage ]

    2/2/5

    The 5/1 ARM potentially has 2/2/5 caps, depending on the loaning institution. Let’s break it down to its numbers:

    The first 2 in 2/2/5: This is your rate adjustment after five years. The interest on your loan can’t go up or down more than 2%.

    The second 2 in 2/2/5: This indicates a yearly adjustment after the first two years. It cannot go up or down more than 2%.

    The 5 in 2/2/5: The highest rate your loan can go up or down is by 5%, and that is for the entire duration of your loan.

    After the primary interest rate adjustment, the interest cannot increase or decrease any more than 2%.

    Index margin

    The most common benchmark for the index margin is called LIBOR, or London Interbank Offered Rate. LIBOR is used by credit agencies and lending companies worldwide when charging one another for short-term loans. The LIBOR rate is based on the strengths of the U.S. dollar, the euro, the pound sterling, Japanese yen, and the Swiss franc. Loan rates moving up or down this rate is partially the reason. After yearly surveys of banks adding up the rates at which they can borrow money, the numbers are averaged and reported to make up the index margin for ARM loans.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Nicky LeMarco

    Contributing Writer

    Nicky LaMarco is a business and finance writer who has written for Interest, Bizfluent and Houston Chronicles.

    Reviewed by

    • Angelica Leicht
      Angelica Leicht
      Editor

      Angelica Leicht is a writer and editor who specializes in everything mortgage-related for The Simple Dollar. Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, Bankrate, The Spruce, Houston Press and VeryWell, among others.