Points of Interest
Adjustable-rate mortgages (ARMs) can be a unique solution for borrowers who want a low monthly mortgage loan payment and have a solid plan for what to do when the rate adjusts.
ARM loan rates are near historic lows right now, but ARM rates don’t tell the whole picture to buyers who are looking for this type of loan. The best ARM loan lenders of 2020 offer flexibility and educate their readers with tons of online resources. These lenders will work with first-time borrowers, people who don’t have a lot of cash for a down payment or people with bad credit.
If you’re looking to fix up an investment property to sell it later, or if you plan to move in a few years, an ARM can be the perfect solution — especially if you can snag one of the best current ARM mortgage rates on the market today.
The 5 best ARM loan lenders of 2020
- New American Funding — Best for bad credit ARM loans
- loanDepot — Best for new or first-time homebuyers
- Guild Mortgage — Best for financing with a low down payment
- PrimeLending — Best for closing cost assistance
- Home Point Financial — Best for online resources
|Minimum deposit||Minimum credit score||Current 5/1 ARM rate|
|New American Funding||3.0%||580||Unavailable|
|Home Point Financial||3.0%||620||Unavailable|
What is an adjustable-rate mortgage?
An adjustable-rate mortgage — often referred to by its acronym, ARM — is a 30-year mortgage loan with an interest rate that starts out fixed, but doesn’t stay fixed for the entire length of the term. After an initial fixed-rate period, the interest rate for this type of loan converts to a variable rate that adjusts periodically. For instance, a 5/1 ARM will have a fixed interest rate for five years. The loan then converts to a rate that adjusts annually. Banks calculate the floating rate by adding an ARM margin to a current index, like the maturity yield on a one-year treasury bill.
Types of ARM loans
- 10/1 — The 10/1 ARM switches to a floating rate after 10 years, then readjusts every year thereafter. When fixed-rate mortgage rates are low, you’ll spend a little more to have this stability.
- 5/1 — This is the most common form of ARM. The period of time spent at the quoted interest rate is five years, and the rate readjusts each year thereafter.
- 7/1 — A compromise between the riskier 5/1 and the more stable 10/1, the 7/1 ARM is competitively priced but gives you time to sell up or restructure your home loan. You will have 7 years at the quoted interest rate before it adjusts to an annual floating rate.
ARM vs. fixed-rate mortgage
Fixed-rate mortgages come in a variety of terms, the most common being 15, 20 and 30 years. Once you lock in the rate, it doesn’t change for the life of the loan. Although you’ll likely pay a higher interest rate than you would with an ARM, fixed-rate mortgage loans are a better deal for people looking for stability over time.
ARMs, on the other hand, are for those who expect their circumstances to change. For instance, they may even be investors and plan only to live in that location for a short time.
There are caps on how high the adjustable-rate mortgage rate can go, but they are still riskier than fixed-rate loans — after all, just one point higher can add hundreds of dollars to your monthly payment.
The 5 best ARM loan lenders of 2020
New American Funding — Best for bad credit ARM loans
New American Funding, which has branches in 48 U.S. states, offers ARMs for both conventional and federally backed mortgages. It also offers several mortgage loans requiring minimal or no down payment, including USDA, VA, and FHA loans. It works with a full range of borrowers, including self-employed people and folks with bad credit, and it is a great choice for those seeking a government-backed mortgage.
loanDepot — Best for new or first-time homebuyers
loanDepot is an online mortgage lender licensed to operate in all 50 states. The company offers a lifetime guarantee. If you decide to refinance your loan with the lender, it will reimburse appraisal fees and waive lending fees. It has a proprietary loan engine, mello smartloan™, that securely inputs your financial information and determines the loan options that will save you the most money — a great resource for first-time buyers. It offers 3/1, 5/1, 7/1 and 10/1 ARMs.
Guild Mortgage — Best for financing with a low down payment
Guild Mortgage is an online lender available in every state except for New Jersey and New York. It offers a full range of mortgage loan products, including ARMs. Where Guild Mortgage outshines the competition is its commitment to helping low-income people become homeowners. The company helps buyers connect with the down payment assistance (DPA) programs in their area to make homeownership affordable, and it gives eligible buyers $1,500 back in closing costs.
PrimeLending — Best for closing cost assistance
Texas-based PrimeLending is an online mortgage loan company selling a range of conventional and government-guaranteed loans, including adjustable-rate loans. It offers its own proprietary closing cost assistance program, the NeighborHood Edge program, which gives eligible buyers up to $2,000 back in closing costs, as well as other down payment assistance programs.
Home Point Financial — Best for online resources
Home Point Financial offers a wide range of mortgage loan products, including conventional and government-backed loans, ARMs, renovation loans and HELOCs. Its Resource Center is one of the best available; you can read up on everything from the closing process to industry trends and the benefits of a given mortgage product.
The final word
An adjustable-rate loan (ARM loan) allows you to make lower monthly payments because ARM mortgage rates are lower than fixed-rate mortgages. It’s a good option for people who need to save money now (and know their financial situation is going to improve later) or for buyers who plan to move in a few years. It also works well for investors who are holding onto the property in the short-term.
You need to be careful with ARMs, though. If you’re unable to get out of the loan once the adjustable-rate period takes effect, you could easily wind up with monthly payments that well exceed your budget.