Understanding Adjustable Rate Mortgages

Unknown Speaker

Hey everybody, welcome back to the Reliant Mortgage Solutions Podcast—I'm Sean, and as always I'm here with my co-host, James. Today we're breaking down adjustable-rate mortgages, or ARMs, because there's just a ton of confusion out there, even though they've been around for quite some time I still see it. A lot of folks hear "adjustable" and you can sense hesitantcy right away.

James Eveld

Yeah, you're not kidding. I mean, ARMs can sound... risky to a lot of folks. But honestly, when you understand what they actually are—how you get that fixed rate upfront for, say, five or seven years, and only after that do things start adjusting—it just makes a little more sense.

James Eveld

So with that being said, lets get right into some details- Basically, with an ARM, the lender gives you a lower, fixed interest rate for a set period, and then it moves based on market conditions after that. It's a lot less mysterious when you lay it out there. And, by the way, lately they've actually been gaining traction—a recent stat shows about 11 percent of transactions are ARMs right now. So they're definitely catching on again lately.

Unknown Speaker

Yeah, exactly. And, you know, the big reason folks get tripped up is all the terms you see tossed around—like "caps," "index," "margin." I had a client here in Georgia, actually. He called me—he was considering an ARM but was also a bit overwhelmed by all the jargon, but once I explained it, and broke down what a cap meant and what a margin meant

Unknown Speaker

and how, for ARMs, the index is what changes while the margin always stays the same—well, the guy was way less worried.

Unknown Speaker

I think that’s the thing, it’s not as complicated as it seems after someone explains the details.

James Eveld

Yeah, I mean honestly, ARMs have a clouded reputation, but so much of that is just because people only hear the horror stories from, you know, those rate hikes in the past. But now, with most ARMs, you’ve got safeguards—like caps that limit how much the rate can jump at any one time. It's really designed to be more transparent. It's just like you said, once you get past the jargon, it’s a tool like any other in the toolbox.

Unknown Speaker

Right. And compared to a 30-year fixed mortgage, which everyone thinks of as the "safe" option, ARMs can actually be the better fit for a lot of folks—especially if you only need that loan for five, seven, maybe ten years. You get those lower payments and flexibility upfront. James, you wanna walk folks through some of the actual types of ARMs out there?

James Eveld

Yeah, let's do it. So, the most common types you’re gonna see are 5/1, 7/6, 10/6, and 3/1 ARMs. That first number? That’s how many years the rate stays fixed. After that, it adjusts—every year with a 5/1, every six months with a 7/6 or 10/6, or every year with a 3/1. So, a 5/1 gives you five years locked in, then resets once a year. The adjustment itself is based on something called an index, and ARMs today mostly use things like the SOFR index or the Constant Maturity Treasury—CMT for short. Your interest rate becomes the index plus a fixed "margin," which your lender sets up front.

Unknown Speaker

I always have to remind people—the margin is basically set in stone once you close. The index? That can go up or down, depending on the market, but your margin stays put. And then you've got these caps, like... let's say you pick a 5/6 ARM, you might see caps that are 2/1/5. That means, after your initial five years, your rate can adjust by up to 2% the first time, no more than 1% every six months after, and no more than 5% over the life of the loan.

James Eveld

Exactly. And when you're deciding if an ARM might fit, you wanna ask yourself: are you sure you're gonna stay in this house five, seven, even ten years? Or are you maybe an investor—someone looking for a better initial payment on a flip or a rental property? A lot of investors love ARMs because they can get a lower payment right out the gate, move on, and never even hit that first adjustment. An ARM might also be a good fit if you’re someone who expects a big financial change soon, like selling in a few years or planning a refi.

Unknown Speaker

And because the ARM qualifications are typically at a fully indexed rate—meaning the margin plus the index—it can be a little stricter. But for the right scenario, it really opens up a lot of doors. There’s even a lot of types out there and they are especially handy for buyers that arent looking to stay for the long term, the buyers who really just want to minimize payments for a few years. Maybe we should talk next about what makes ARMs both exciting and a little tricky?

Unknown Speaker

The big advantage, honestly, is that initial rate you lock in with an ARM is almost always lower than what a fixed mortgage can offer you at the same point in time. I had a family in Marietta recently, the 5/1 ARM gave them five solid years of easy payments, and their whole plan, right from the get-go, was to refinance before that first rate change hit. It let them buy now rather than wait on the sidelines.

James Eveld

Yeah, I mean, I always tell people—an ARM is just a really solid fit if you know you’re only gonna be in the house for less than that fixed period. Like, if you’re thinking three years but you’re in a 5/1 ARM, you might never see an adjustment at all. And during those years, your monthly savings add up, or maybe free up cash to invest elsewhere. Sometimes we focus so much on the risk we forget the actual math, you know?

Unknown Speaker

Totally. There are some challenges to be aware of. Number one: your monthly payment can go up after the fixed period ends, especially if rates have climbed. That could hurt the budget if you’re not prepared, but the rate can also go down if the index decreases. You have to understand all the moving parts: your caps, your margin, the index it’s tied to, and, if I’m honest, a lot of folks just don’t like the idea of not knowing for sure what their payment will be in that sixth or eighth year. In that case fixed-rate loans definitely win on predictability, but if you are willing to take a bit of a chance you can save with an ARM.

James Eveld

Yeah, and budget unpredictability is real. So, if the idea of payments changing makes you sweat, that's something to think carefully about. But like we keep saying, it's about your actual life plans—choose the mortgage product that fits your real timeline. If you’re planning to move or refi, the risk can be pretty minimal. If you’re planning to raise grandkids in that house, eh, you might wanna look at a fixed rate.

Unknown Speaker

And just like we’ve mentioned in earlier episodes, especially that FHA ARM one, don’t try to navigate this alone if you’re not sure. Work with a lender or a broker—hint, hint—who can explain all the fine print.

James Eveld

Absolutely. Well, that about covers it for today, folks. We hope this gives you a solid foundation on how ARMs work and whether they might be a fit for you. We’ll be back with more deep dives soon. Sean, always a pleasure doing this with you.

Unknown Speaker

Same here, James. Thanks for tuning in, everyone. We’ll catch you next time on the Reliant Mortgage Solutions Podcast. Take care, y’all!