Today's national ARM loan rate trends. For today, Tuesday, July 19, 2022, the national average 5/1 ARM APR is 5.870%, up compared to last week's of 5.700%. The national average 5/1 ARM refinance APR is 5.730%, up compared to last week's of 5.580%.
ARM benefits
The advantage of a 5/1 ARM is that during the first years of the loan when the rate is fixed, you would get a much lower interest rate and payment. If you plan to sell in less than six or seven years, a 5/1 ARM could be a smart choice.
For example, if you plan to live in your house for eight to 10 years, taking out a 10/1 ARM (where the introductory rate lasts 10 years) is more cost-effective. A 10/1 ARM is usually between 0.25% to 0.5% less expensive than a 30-year fixed-rate mortgage.
A 7/1 ARM is a good option if you intend to live in your new house for less than seven years or plan to refinance your home within the same timeframe. An ARM tends to have lower initial rates than a fixed-rate loan, so you can take advantage of the lower payment for the introductory period.
Bottom line. Refinancing an ARM to a fixed-rate mortgage can be a wise investment in your financial future, potentially saving you thousands in lower monthly mortgage payments over the life of the loan. Not only that, you'll be spared the uncertainty and stress that may accompany a fluctuating mortgage rate.
Loan terms
As you look to get a mortgage, remember that 10/1 ARM loans often have an overall term of 15 or 30 years. So, you'll enjoy a fixed rate for 10 years, and then, depending on the term, your rate will change annually for the remaining five or 20 years.
As a rule of thumb refinancing to save one percent is often worth it. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases. For example, dropping your rate a percent — from 3.75% to 2.75% — could save you $250 per month on a $250,000 loan.
The average 30-year fixed-refinance rate is 5.70 percent, unchanged since the same time last week.
Higher mortgage rates ahead
Peering ahead to the end of the third quarter of 2022, there likely won't be a drop in rates, in part due to the Fed's efforts to combat inflation. While the Fed's decisions don't directly affect fixed mortgages, there is a knock-on effect in the home loan market.
During periods of rising interest rates — like we've seen this year — ARMs offer a great option for borrowers to save money. As the Federal Reserve plans hikes for each of its remaining 2022 meetings, the mortgage rate surge could continue building momentum.
The lowest historical mortgage rates in history for 30-year FRMs were more recent than you might think. December 2020 saw mortgage rates hit 2.68%, according to Freddie Mac, due largely to the effects of COVID-19. The same goes for the lowest average, with an annual rate of 3.11% for 2020.
The current national average 5-year ARM rate is down 17 basis points from 5.08% to 4.91%.
With an adjustable-rate mortgage, your payments can increase or decrease with interest-rate changes, based on the terms of your individual loan and a benchmark rate index. In some cases, choosing an ARM over a fixed-rate mortgage could be a solid financial decision, potentially saving you thousands of dollars.
ARMs are easier to qualify for than fixed-rate loans, but you can get 30-year loan terms for both. An ARM might be better for you if you plan on staying in your home for a short period of time, interest rates are high or you want to use the savings in interest rate to pay down the principal on your loan.
With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
Another con of an ARM is that your loan terms and interest rate may at first be more lenient because of the lower monthly payments. So, if you want to refinance down the line into a fixed rate, it could be difficult to get approved for the same size mortgage loan.
Prepayment penalties.
Some ARMs, especially interest only and payment options, charge fees if you try to pay off the loan early. That means if you decided to sell your home or refinance it, you will pay a penalty on top of paying off the balance on your loan.
Variable-rate mortgages are often the best choice
According to many economic experts, in most cases variable-rate mortgages are more beneficial in the long-term compared to fixed-rate mortgages.
Often, he says, people will find that the 10/6 ARM is “the best of both worlds,” giving them a lower interest rate than fixed rate loans such as a 30-year fixed but with more stability than a 5/6 ARM.
Cons of an adjustable-rate mortgage
Rates and payments can rise significantly over the life of the loan, which can be a shock to your budget. Some annual caps don't apply to the initial loan adjustment, making it difficult to swallow that first reset. ARMs are more complex than their fixed-rate counterparts.
After that initial period ends, the low rates on these loans adjust, usually increasing. With a 10/1 ARM, your interest rate will remain fixed for 10 years and will then adjust once every year until you pay off your loan, sell your home or refinance your mortgage.