3/1 ARM Mortgage Rates

Compare today's current mortgage and refinance 3 year ARM interest rates.

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Adjustable-rate mortgages can seem intimidating. The thought of only locking in an interest rate for a short period of time could be risky, and when you are talking about a mortgage totaling hundreds of thousands of dollars (or more!), many home buyers run away. But there are two sides to an adjustable rate mortgage and knowing the details of ARMs can help borrowers make the right choice, one which could save them thousands of dollars in interest.

In the mortgage lending arena, some of the most competitive interest rates are found adjustable-rate mortgages. They come in a variety of terms (like 3/1, 5/1, 7/1 and 10/1) and each carries its own interest rate. In many instances, the initial rates offered are much more attractive than a fixed-rate mortgage.

But before you see stars (and savings) in your eyes for a 3/1 adjustable-rate mortgage, here is an overview:

What is a 3/1 ARM?

The 3/1 adjustable-rate mortgage (ARM) is a home loan which has one interest rate for a set period followed by a rate which changes at a specific frequency. The numbers X/Y correspond to the following:

  • First Number (X) is the number of years in which your interest rate is fixed. It will not change during this period; in this case, 3 years.
  • Second Number (Y) is the frequency in which the rate will change after the first period has lapsed. In this case, after the 3-year period has ended, the interest rate will change annually.

Typically, the longer the term, the higher the interest rate. This means that the 3/1 ARM is usually the rock star of adjustable rate mortgages. With a low interest rate, you can build equity quickly when compared to fixed rate mortgages and longer term ARMs.

How does the 3/1 ARM work?

After the fixed rate period (in this case, 3 years), the interest rate (and your monthly payments) will change based on how rates fluctuate, enabling the borrower to save a lot of money each month in the initial fixed term.

As attractive as that initial rate can be, you must be prepared for the rate to change, on an annual basis. Then you will be subject to fluctuating interest—and payment amounts. To prevent monthly payments from getting out of control, many ARMs will include an annual ARM cap, a limit on the interest rate or dollar amount you may have to pay. This protects the borrower from a situation where drastically higher mortgage payments could become unbearable.

The market force on the 3/1 adjustable-rate mortgage

Once the initial 3-year term has ended, the interest rate will change annually, based on certain market factors called the INDEX and the MARGIN.

At the end of the fixed rate period (and every year afterwards), the lender considers current market rates and adds the margin amount to determine the new mortgage rate and monthly payment.

INDEX: The index is a complication of different interest rates on the market, expressed as an average. There are several indexes available to lenders, including:

  • Secured Overnight Financing Rate (SOFR) is an index based on the rates that large financial institutions pay each other for overnight loans and is well-respected due to its transparency.
  • Constant Maturity Treasuries (CMT) the monthly one-year CMT value is often tied to ARMs.
  • The Cost of Funds Index (COFI) is calculated as the sum of the monthly average interest rates for marketable Treasury bills and for marketable Treasury notes, divided by two, and rounded to three decimal places.
  • The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans, but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out.

MARGIN: In the business of originating home loans, lenders will add an additional percentage to the index to arrive at your final rate. For example, if you have a margin of 3.25% and your rate adjusts based on the CMAT index (at 0.1%), your final interest rate would be 3.35%.

The good news is that you can ask a prospective lender upfront about their fees. Part of your mortgage costs will include fees so it’s crucial to know everything that’s included! Most lenders are transparent about these fees—the index they use and their margin—to allow prospective borrowers the opportunity to make a well-informed choice.

Interest rate cap – reducing the risk of steep changes

The idea of an “adjustable rate” may scare off some borrowers, but it doesn’t have to. The rate adjustment is limited, preventing borrowers from a shocking payment increase. Lenders typically issue caps in three different adjustments, called the initial adjustment, subsequent adjustment, and the lifetime cap. One of the most common ratios for the interest rate caps is 2/2/5. The cap structure is explained here:

  • The initial adjustment cap is applied when the fixed rate period of the 3/1 ARM ends. In the common 2/2/5 example, the lender is limited to adjusting the interest rate no more than 2 percentage points higher than the initial rate, regardless of interest rates at the time.
  • Subsequent adjustment caps come into play each year when the 3/1 ARM interest rate changes. In the 2/2/5 cap, this interest rate is also limited to a maximum 2 percent change over the current rate.
  • The final number in the interest rate cap number is the lifetime cap. At no time during the life of your 3/1 ARM can the interest rate change more than the stated amount; in the case of the 2/2/5 cap, it cannot increase more than five percent.

Important interest rate factors:

Even though the adjustable rate mortgages could offer lower interest rates, you must keep in mind some important financial factors driving all mortgages:

  • FICO score. Your personal financial “reputation” is reflected in your FICO score. A rating of 700+ is considered a good score.
  • Mortgage use. Typically refinance mortgages are slightly higher than purchases.
  • Property Use. Lenders are eager to offer the best rates for primary homes, with higher interest rates for second homes and rental properties.
  • LTV (loan-to-value) Ratio. When you borrow a higher percentage of the home’s purchase price or value, the interest rate is generally higher (you represent a higher risk).
  • Conventional/Low Down Payment. Since ARMs are considered a higher risk loan product, most lenders look for borrowers with a larger down payment.
  • Jumbo vs. Conforming Loans. Jumbo ARM loans exceed the conforming lending limits set by the federal government. Only the highest qualified borrowers are eligible for a Jumbo ARM.
  • Location. Local economic factors can affect mortgage interest rates. A stronger economy means a stable real estate market and lower interest rates, where a less stable economy and real estate market could equate to a higher risk for foreclosure and thus, higher interest rates.
  • Buydown. When borrowers put some money down up front to lower the interest rate, they can save thousands of dollars. This option isn’t always the best choice and one to discuss with your lender.

How long is a 3/1 ARM term?

Contrary to what the name may indicate, the 3/1 ARM usually has an overall length of 10 years, giving you a 3-year fixed term with a rate adjustment occurring annually for the 27 remaining years of the term.

Is a 3/1 ARM right for you?

Pros:

Lower initial payments. When interest rates remain low, you can save on interest. One additional way to save money spent on interest is to make extra payments on the principal during the lower rate, fixed 3 year period. This will allow you to pay off your mortgage earlier.

Flexibility. You can still refinance your home during the 3-year period, especially if rates stay low or drop. You could move to a longer-term ARM or move to a fixed-rate loan if there is a drop in interest rates.

Rate Caps offer you some protection. Even though your mortgage will switch to an annual rate change after the 3-year period, built-in rate caps protect you from major interest rates changes.

Cons:

Potential for higher total interest paid. Once the 3 year fixed term is over, you are at the mercy of current interest rates. If interest rates continue to climb, at the end of the loan, you could have paid a lot more in interest when compared to a fixed rate mortgage.

Risk of increasing mortgage payments. If interest rates increase after the fixed 3-year period, you will probably experience higher monthly payments. If you maintain a tight budget, this could affect your financial health.

Overall risk. If you are unable to refinance or sell your home at the end of the fixed rate and overall interest rates rise, you may struggle to pay your mortgage or sell your home during a slump.

Penalty for Early Payoff. Some lenders include a prepayment penalty on ARMs, preventing you from refinancing or selling within the limits they have established. Be sure you understand any prepayment restrictions your lender may impose.

An ideal 3/1 ARM consumer

A 3/1 ARM offers borrowers the chance to take advantage of competitive interest rates, and the lower payments mean you can afford a larger house (and mortgage). It is a good option for borrowers who plan to relocate and/or upgrade their homes as their income increases or are highly qualified and can take advantage of the best ARM mortgage rates. It is also a good option for home buyers who are confident they will be selling or refinancing their home within the initial fixed rate period and want to take advantage of an especially low interest rate.

 

Start the process for a 3/1 ARM mortgage today

Start the process for either a purchase or refinance 3/1 ARM mortgage and have a licensed loan officer contact you for a custom quote today.

What is a 3/1 ARM mortgage?

A 3/1 ARM (short for adjustable rate mortgage) is an adjustable rate loan which includes a short 3-year fixed period, followed by a changing interest rate every year (hence the “1” in the designation) until the loan is paid off. Although this ARM option comes with a short fixed period, it may be just what a physician needs to get on top of some other debt or pad your savings with the thousands saved in this initial term.

How does a 3/1 ARM mortgage work?

Offering good interest rates, your loan payments will be fixed for a period of three years before switching to an annual rate adjustment until the loan is paid off or refinanced.

Is a 3/1 ARM mortgage loan a good idea?

Locking in your interest rate for only 3 years may sound risky, but it could be the right choice for you. If you are under contract with a hospital for a few years, with the potential for a move afterwards, this could be a great option. Since many physicians see a big boost in income over time they are prepared to refinance or gamble with the changing rates after the initial term.

Lock in your 3/1 ARM rate today

With a wide variety of financing options a loan officer can help you find and lock in the best 3/1 ARM mortgage rate for purchasing a home or refinancing your existing mortgage. Contact us to get started today!

3/1 ARM mortgage rates change daily and are determined by 5 major driving factors which you can control: Property type and use, loan-to-value ratio, your FICO score, and whether you are purchasing or refinancing the mortgage.

Getting the lowest 3/1 ARM jumbo refinance rate depends on 4 main elements: the refinance type (rate/term or cash out), the amount of equity you have in the property, any second mortgages, liens or subordinate financing you already have, and your financial report card.

Jumbo (loan amount >$548,250) 3/1 ARM rates are typically higher than conforming loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.

Conforming (loan amount <$548,250) 3/1 ARM rates are typically lower than jumbo loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.

Get started with a purchase or refinance mortgage loan today!

Get started with a purchase or refinance mortgage loan today!

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