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What is a 3/1 Arm?
A 3/1 Adjustable Mortgage (ARM) is a type of mortgage with a fixed interest rate for the intro period, and has a variable interest rate once the intro period has ended.
These loans typically have a 30-year term of office. Interest rates are fixed for three years and then adjusted annually over the next 27 years.
How does a 3-year adjustable mortgage work?
For the first 3 years, the 3/1 arm works like that Fixed-rate mortgage: Set monthly payments.
Once those three years have passed, the rates will be adjusted annually. Lenders can adjust up and down based on the margins set by the lender in addition to the performance of the index tied to the mortgage.
Some of the indexes that lenders use to price their arms include a one-year Treasury bill, the 11th District Funding Cost Index (COFI), and a protected overnight funding rate (SOFR). For example, if the Treasury bill yields rise, the lender will increase your arm percentage. This results in an increase in monthly payments.
Luckily, the arms generally come with an adjustment cap. These limit how much your lender can change your interest rate. Usually, at both each adjustment interval and the lifespan of the loan.
Arm Terminology you should know
3/1 Time to consider an arm loan
It makes sense to consider a 3/1 arm in various situations.
- You want to enter the house at a lower interest rate now, but have plans to move in the near future.
- I plan to refinance with a new loan before the low-cost intro period ends.
- You can expect certain scenarios that will need to be moved soon, such as planning to move you in a few years.
When considering the 3/1 arm, you can remember the following points:
How 3/1 arm is compared to other loan types
The three-year adjustable mortgage is very similar to the rest of your arms. The main difference between these loans is the length of the introduction period, where the interest rate remains fixed.
Other common arms include:
- 5/1 Arm Or 5/6 arm: Fees remain fixed for five years, then adjust annually or every six months for the remainder of the loan.
- 7/1 Arm Or 7/6 arm: Fees remain fixed for seven years, then adjust annually or every six months for the remainder of the loan.
- 10/1 Arm Or 10/6 Arm: Fees remain fixed for 10 years, then adjust annually or every six months for the remainder of the loan.
Generally, the longer the introduction period, the higher the interest rate will be during that window. For example, a 3/1 arm may have a lower adoption rate than a 7/1 arm.
3/1 Adjustable Mortgage and Fixed Rate Mortgage
In contrast to the 3/1 arm, Fixed-rate mortgage Maintain the same interest rate for the life of the loan. For example, if you choose a 30-year fixed-rate mortgage, your 30-year interest rate will remain the same.
Most borrowers get fixed-rate mortgages as monthly payments often drop over time compared to their arms, and fixed interest rates make budgets much easier. With a 3-year adjustable mortgage, you can get overhead if the fee is too high.
