An adjustable-rate mortgage (ARM) starts with a lower fixed rate for an introductory period and then can change later based on the loan terms. For Washington home buyers, the main tradeoff is straightforward: lower initial payments in exchange for less certainty down the road.
If you are deciding between an ARM and a fixed-rate mortgage, this guide will help you understand how ARM loans work, when they can make sense, and what to review before choosing one.
You have quite a few mortgage options when buying a home in Washington State. One of your primary choices has to do with the interest rate structure. Do you want to use a home loan with a fixed or adjustable rate?
Today, we will look at the pros and cons of using an adjustable-rate mortgage (ARM) loan when buying a house in Washington.
But before we get to the pros and cons, we need to talk about what an adjustable-rate mortgage is, and how it works.
As its name suggests, an adjustable mortgage has an interest rate that can change over time. Usually, these changes or “adjustments” occur once per year, following an initial phase where the rate remains fixed.
For example, a “5/1” ARM loan starts off with a fixed mortgage rate for the first five years. That’s what the number 5 signifies in the name. After that five-year period, the rate will begin to adjust annually — or every “1” year. Hence the term 5/1 ARM loan.
That’s just one example. These mortgage products come in many forms. The biggest difference between these loans and fixed-rate loans is that these mortgages come with interest rates that will fluctuate at various intervals, depending on the exact rate structure of the program.
The adjustable nature of these home loans distinguishes them from fixed-rate mortgage loans, which carry the same rate of interest for the entire repayment term.
Explore in-depth: ARM vs. fixed
You might wonder why a person would want to use a mortgage product with an interest rate that can change over time. Why would a borrower seek such a loan in the first place? To answer that question, we have to move on to the pros and cons part of our discussion.
The main appeal of an ARM is that it can reduce your interest cost and monthly payment during the introductory fixed period. For some Washington buyers, that lower starting payment can make homeownership more manageable in the early years.
This is the primary advantage of using an ARM loan to buy a house in Washington, and it’s what attracts most borrowers to these products in the first place. People who use adjustable mortgages are often able to secure a lower interest rate during the first few years, which can result in a lower monthly payment.
The tradeoff is that the rate is not fixed for the full loan term. After the introductory period ends, the rate can adjust based on the structure of your specific loan. That means your payment could rise later, which is the biggest risk borrowers need to plan for.
Rather than relying on a generic example, review the fine print for your actual loan terms carefully. In particular, pay attention to the index, the lender’s margin, the cap structure, and whether the loan includes a floor provision. Those details determine how the rate may change after the fixed period ends.
It also helps to understand how caps work. Some caps limit how much the rate can change at a single adjustment, while others limit how much it can increase over the life of the loan. Those limits can reduce the speed or size of future increases, but they do not eliminate the possibility of a higher payment.
Before your payment changes to a new adjusted level, required disclosures are provided in advance. That gives borrowers time to review the upcoming change and prepare for the new payment amount.
Because there are different kinds of adjustable-rate mortgages with different features, you have to understand how your particular product will work over the long term.
An ARM home loan isn’t for everyone. However, there are certain buyers who might want to consider this type of mortgage program and may find it advantageous for them. ARMs should be considered if you:
An ARM may not be right for you (and therefore a fixed-rate mortgage may be better) if you:
It’s important that you weigh the pros and cons of an ARM and assess your particular situation before you choose this type of loan program over another.
A simple way to evaluate an ARM is to ask four practical questions.
First, how long do you realistically expect to stay in the home? If you are fairly sure you will move before the first adjustment, an ARM may be easier to justify.
Second, how likely are you to refinance before the introductory fixed period ends? If refinancing is a key part of your plan, remember that future loan approval and market conditions are never guaranteed.
Third, could your budget still work if the payment rises later? This is one of the most important tests. Even if the initial payment looks attractive, the loan still has to make sense if the rate adjusts upward within the loan’s cap structure.
Fourth, how much do you value payment stability? Some borrowers are comfortable with uncertainty in exchange for lower upfront costs, while others prefer the predictability of a fixed rate from the beginning.
If you expect to keep the home for many years and want stable payments, a fixed-rate mortgage may be the better fit. If you expect a shorter time horizon and want to reduce your initial payment, an ARM may be worth a closer look.
Before choosing one ARM over another, compare the specific terms in each loan offer instead of focusing only on the starting rate.
Start with the introductory fixed period. A 5/1 ARM and a 7/1 ARM may both offer lower initial payments than a fixed-rate loan, but they do not give you the same amount of payment stability.
Next, review the adjustment schedule so you know when the first change can happen and how often later adjustments may occur.
You should also look closely at the index and the margin, since those help determine how the new rate is calculated after the fixed period ends. Then review the periodic cap and lifetime cap so you understand how much the rate can change at one adjustment and over the full life of the loan.
Finally, ask the most important real-world question: if the rate rises later, would the payment still fit your budget? Comparing ARM offers this way can help Washington home buyers choose a loan that works not just at closing, but after the introductory period as well.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
An adjustable-rate mortgage starts with a fixed interest rate for an introductory period and then can adjust later based on the loan terms. For example, a 5/1 ARM keeps the same rate for the first five years and then typically adjusts once per year after that.
The main advantage of an ARM is a lower initial interest rate and payment during the fixed introductory period. The main drawback is that the rate can change later, which can increase the monthly payment and reduce long-term payment certainty.
It can be a good idea for borrowers who want lower upfront payments and expect to sell or refinance before the first adjustment. It may be less suitable for borrowers who want predictable payments for the full loan term or who would struggle if the payment rises later.
Not necessarily. An ARM can make sense when the lower starting payment matches your plans and your budget could still handle a higher payment later. The better question is whether the loan still works for your finances if the rate adjusts upward within the cap structure.
A 5-year ARM may be worth considering if you realistically expect to move or refinance before the first adjustment happens. If you expect to keep the home longer and want stable payments, a fixed-rate mortgage may be a better fit.
A 7-year ARM may appeal to borrowers who want a longer fixed introductory period than a 5-year ARM while still aiming for a lower starting rate than a fixed-rate loan. The key is to compare how long you expect to stay in the home, whether refinancing is realistic, and whether your budget could absorb a later payment increase.
The biggest disadvantage is uncertainty after the fixed period ends. Your rate and payment can rise later, and future affordability depends on details like the index, margin, caps, and any floor provision in the loan terms.
After the introductory fixed period ends, the interest rate can adjust according to the structure of the loan. If the new rate is higher, the monthly payment can rise. Required disclosures are provided in advance so borrowers have time to review the upcoming payment change.
Rate caps limit how much the interest rate can change. Some caps restrict how much the rate can increase at a single adjustment, while others limit how much it can increase over the life of the loan. These limits can reduce the size or speed of increases, but they do not prevent payments from going up.
Washington buyers should compare the introductory fixed period, the adjustment schedule, the index, the lender’s margin, the periodic cap, and the lifetime cap. It is also important to ask whether the payment would still fit the budget if the rate rises after the fixed period ends.
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