The choice between an ARM and a fixed rate comes down to the borrower's expected holding period and their tolerance for rate movement after the fixed period ends. ARMs are not inherently risky for informed borrowers. They are mispriced for borrowers who will stay in the home for 20 years and treat the initial period as permanent.
ARM Structures in 2026
The most common ARMs are 5/1, 7/1, and 10/1. The first number is the fixed period in years. The second is how often the rate adjusts after that, typically annually. Rates for the fixed period are based on the underlying index (typically SOFR) plus a margin set at origination. The margin does not change.
Who Benefits from an ARM
- ✦Borrowers selling or refinancing within the fixed period
- ✦Investors financing rental properties with a 5-year exit strategy
- ✦High earners expecting income growth to handle future rate adjustments
- ✦Jumbo borrowers: the spread between ARM and fixed is wider, so dollar savings are larger
- ✦New construction buyers locking months in advance: a 10/1 ARM covers the build period plus 7+ years of ownership
Qualifying Rate for ARMs
Fannie Mae and Freddie Mac require lenders to qualify ARM borrowers at the note rate for 5/1, 7/1, and 10/1 ARMs. For ARMs with shorter initial periods (less than 5 years), lenders must qualify at the fully indexed rate or the note rate plus 2%, whichever is higher. This prevents borrowers from being qualified at a teaser rate they cannot sustain post-adjustment.
Aria can compare ARM and fixed-rate payment scenarios for any loan amount and holding period, including fully indexed rate projections. Ask at vicariointel.com.
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