Best 3 Year Mortgage Rates: Compare 3 1 ARM Hybrid Home Loans to 15 & 30 Year FRM Options

To figure out if you’ll save money, compare 3/1 ARM interest rates with 30-year fixed rates. Ask the lender which index influences the ARM interest rates and whether the loan comes with rate caps. By taking out a 3/1 ARM, your home costs might be cheaper for a few years.

Considerations and Risks

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.

Adjustable-Rate Mortgage: What an ARM Is and How It Works

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.

How are ARM rates calculated?

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 3/1 arm rates today like any other ARM. The main differentiator with these loans is the length of the introductory period, during which the interest rate stays fixed.

Current ARM mortgage rates

• With an interest-only loan you are paying only the interest for the initial 3 year period.
• But your monthly payments will go up once principal payments and rate adjustments kick in.
• Some states let homeowners claim a double deduction, meaning that they can claim the mortgage interest deduction when they file both their state and federal income tax returns.
• Interest-only loans can give you even lower starting monthly payments than typical ARMs.
• It can be confusing to understand the different numbers detailed in your ARM paperwork.
• Let’s say you’re looking to buy a home worth $200,000 with a 20% down payment.
• That difference could impact you financially, especially if your budget is tight.
• The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination.
• By taking out a 3/1 ARM, your home costs might be cheaper for a few years.

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 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.

• Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky-high rates.
• This is because shorter introductory periods reduce a lender’s risk if rates unexpectedly rise.
• After that period ends, interest rates — and your monthly payments — can rise or fall.
• It allows you to choose among four types of payment types in any given month.
• If you plan to move and sell your home before your adjustable rate kicks in, a 3-year ARM can save you money with low monthly payments.
• Generally speaking, a shorter fixed-rate period will get you a lower starting interest rate.
• As an added bonus, FHA 3-year ARMs have low down payment requirements ― just 3.5%.

Big Cities with the Healthiest Housing Markets

Adjustable-rate mortgages are named for how they work, or rather, when their rates change. As fixed-rate mortgages become more expensive and home prices continue to rise, expect to see ARM rates attract a new following. Here’s how ARM rates work, and how they affect your home buying power. If you take out a 3/1 ARM, you’ll receive a fixed rate for the first three years of the loan.

• These introductory low rates entice buyers with lower monthly payments throughout the initial fixed period.
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• The margin amount, the caps, the maximum lender fees and the potential for negative amortization and payment shock should all weigh more in your decision than the initial rate.
• You may need a score of 640 for a conventional ARM, compared to 620 for fixed-rate loans.
• A loan tied to a lagging index, such as COFI, is more desirable when rates are rising, since the index rate will lag behind other indicators.

What is an adjustable-rate mortgage (ARM)?

Typically, ARM loan rates start lower than their fixed-rate counterparts, then adjust upwards once the introductory period is over. If you’re afraid that you’ll get stuck with a high interest rate beginning with the 37th month of your loan term, you can try to refinance for a fixed-rate mortgage. But if rates are falling and your credit score is excellent, refinancing might be worth it to save you money in the long term.

1 Adjustable-Rate Mortgage Rates

Generally, the longer the introductory period, the higher the interest rate will be during that window. For example, a 3/1 ARM will likely come with a lower introductory rate than a 7/1 ARM. Borrowers who plan to move, upgrade, or downsize within 5 to 10 years often benefit from ARMs. For instance, a family expecting to relocate in 6 years could use a 7/6 ARM to secure a lower rate without worrying about future adjustments. The lender sets the margin, which doesn’t change for the life of the loan. There are a few factors that go into setting an ARM’s variable rate, so it’s important to understand what they are.

Mortgage Tools

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.

Key features of the 7-year ARM

A fixed-rate mortgage (FRM) has a rate that stays the same over the life of the loan. Its rate will never increase or decrease, which also means your mortgage payment will never change. 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. Because you’ll have a lower interest rate than your neighbors with fixed-rate mortgages, you won’t be paying very much interest in the beginning. Before you apply for an adjustable-rate mortgage, it’s best to compare all of the available mortgage rates. That way you can make sure you’re getting the best deal on your home loan.

Conforming loans

During periods of higher rates, ARMs can help you save money in the early days of your loan by securing a lower initial rate. Just keep in mind that after the introductory period of the loan, the rate — and your monthly payment — might go up. When shopping for a 3 year mortgage rate, the initial rate should be of less concern than other factors. The margin amount, the caps, the maximum lender fees and the potential for negative amortization and payment shock should all weigh more in your decision than the initial rate.

ARM adjustments in action

When your ARM adjusts to a higher rate, your monthly payment increases. When the loan adjusts to a lower rate, your payment will decrease. An adjustable-rate mortgage starts off with a fixed interest rate for a certain period of time.

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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.

But three years into the mortgage, the lender might adjust your interest rate — along with your mortgage payment. An adjustable-rate mortgage is a type of home loan with an interest rate that can change over the life of the loan. Sean Briscoe, Director of Products and Payments at Alliant Credit Union, says the variety of ways you can use a personal loan is a major benefit — especially when you’re facing a cash-only expense. It can be confusing to understand the different numbers detailed in your ARM paperwork. To make it a little easier, we’ve laid out an example that explains what each number means and how it could affect your rate, assuming you’re offered a 5/1 ARM with 2/2/5 caps at a 5% initial rate. Because ARM rates can potentially increase over time, it often only makes sense to get an ARM loan if you need a short-term way to free up monthly cash flow and you understand the pros and cons.

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• The lender uses these numbers to calculate your new payment so you pay off the loan by the end of the 30-year term.
• After that, your rate adjusts regularly for the remaining 27 years of your mortgage.
• After the fixed-rate period, the lender adds the SOFR index to the 3% margin to get the new interest rate.
• If you expect a promotion or higher-paying job, you may not mind the higher monthly payments that come after your fixed-rate period ends.
• But when fixed interest rates are at all-time lows, there’s not much of an advantage to choosing an adjustable rate.
• An ARM doesn’t make sense if you’re buying or refinancing your “forever home” or if you can only afford the teaser rate.

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.

Yes, you can refinance your ARM to a fixed-rate loan as long as you qualify for the new mortgage. Yes, you can refinance an ARM just as you can any other mortgage loan. ARM requirements are similar to the minimum mortgage requirements for fixed-rate loans, but with a few significant differences. Especially if you expect interest rates to drop in the next three years, you may want to refinance with a conventional fixed-rate loan.

Pros and cons of a 3/1 ARM

During that time, the monthly payments will be low (since they’re only interest), but the borrower also won’t build any equity in their home (unless the home appreciates in value). ARM intro rates are typically much lower than fixed interest rates. With today’s rates on the rise from their historic lows, ARMs are becoming more attractive to home buyers and homeowners alike. Talk to a mortgage lender about your home buying plans and find out if a low-rate ARM is the right decision for you. If you plan to buy a house or refinance a mortgage in the near future, you should consider ARM loans along with fixed-rate mortgages. The right ARM could increase the loan amount you qualify for or make it easier to buy when home prices are increasing.

After this fixed period, the rate becomes variable, changing once per year. The first adjustment is capped at 5%, limiting the increase in the interest rate and reducing the risk of payment shock. The margin acts as the floor, meaning the interest rate can never be lower than 3%, no matter how much the index rate decreases.

The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence.

The variable rate is tied to a benchmark, typically the Secured Overnight Financing Rate (SOFR). This rate moves based on what’s happening in the economy in the U.S. and abroad, and how the Federal Reserve and other central banks are responding to those trends. Affordability accounted for 40% of the healthiest markets index, while each of the other three factors accounted for 20%. When data on any of the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets. The LIBOR — once a popular index for mortgages — was phased out and replaced by Secured Overnight Financing Rate (SOFR) as of June 30, 2023. As an added bonus, FHA 3-year ARMs have low down payment requirements ― just 3.5%.

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.

The lowest 3/1 ARM mortgage rates are typically reserved for the folks with the best financial track records. In other words, these folks have income stability, plenty of cash savings and high credit scores. That means that for 27 years, these homeowners have to deal with fluctuating interest rates that could make their mortgage payments expensive if rates climb. When the initial fixed-rate period ends, the adjustable-rate repayment period begins.

Negative amortization, to put it simply, is when you end up owing more money than you initially borrowed, because your payments haven’t been paying off any principle. When the loan reaches this level the mortgage automatically converts into a fully amortizing mortgage which requires principal repayment. The following table shows the rates for Los Angeles ARM loans which reset after the third year. 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. ARM caps limit how much the interest rate can change to protect you from sizeable monthly payment increases.

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.