Mortgage rates stayed relatively steady around the 7% mark this week, according to the Mortgage Bankers Association. Higher mortgage interest rates during the past several weeks have stalled home purchase activity ahead of the spring season.
Mortgage interest rates are forecasted to decline somewhat throughout 2024, as the Federal Reserve projects rate cuts will begin sometime this year. Here are the current mortgage rates, as of Feb. 28:
- 30-year fixed: 7.04% with 0.67 points (previous week: 7.06% with 0.66 points).
- 15-year fixed: 6.7% with 0.68 points (previous week: 6.61% with 0.77 points).
- 5/1 ARM: 6.33% with 0.58 points (previous week: 6.37% with 0.71 points).
- 30-year jumbo loans: 7.2% with 0.57 points (previous week: 7.16% with 0.45 points).
- 30-year FHA loans: 6.86% with 0.99 points (previous week: 6.91% with 1.03 points).
An adjustable-rate mortgage is a home loan with an interest rate that changes over time. Unlike with a fixed-rate mortgage, which keeps the same interest rate for the life of the loan, your interest rate will change according to a benchmark rate. Typical loan terms are 15 and 30 years, but 10- and 20-year terms are also common.
The three most common types of ARMs are hybrid, interest-only and payment-option.
- A hybrid ARM is the most common type of adjustable-rate mortgage. It has an initial interest rate that remains fixed for a certain amount of time and then adjusts periodically afterward. So a 5/1 adjustable-rate mortgage has one rate for the first five years and, after that, adjusts every year. A 3/1, 7/1 or 10/1 ARM works the same way, adjusting annually after the initial fixed-rate period (three, seven or 10 years, respectively). However, if the second number is six, such as a 7/6, your rate may adjust every six months after the initial fixed period.
- An interest-only ARM only requires interest payments during the initial payment period. After that, the loan is amortized based on the remaining term, and the monthly payment increases substantially.
- A payment-option ARM allows the borrower to choose from multiple payment options. Usually, the options are standard principal and interest payment; interest-only payment; and limited payment. In the latter, the loan balance increases if you make only required payments.
Pros
- Start with lower rates. ARMs typically start with lower interest rates than fixed-rate mortgages.
- Possible to pay less in the future. If you’re buying a home while mortgage interest rates are high, an adjustable-rate mortgage may be preferable – because if market rates go down in the future, your mortgage rate will go down, too.
- Good for short-term purchases. If you’re only planning to keep your property or mortgage for a short period, an ARM provides lower payments for that duration.
- Fixed-rate conversion is possible. Convertible adjustable-rate mortgages allow you to have lower initial payments than a fixed-rate mortgage, while also allowing you to lock in a fixed rate after a period of time.
Cons
- Rates can increase. With an ARM, your mortgage rate may increase if the market rate increases – which could end up costing you more in the long run.
- Agreements and conditions can be complex. Adjustable-rate mortgages tend to have more conditions and complex agreements than fixed-rate mortgages, which can be riskier for borrowers.
Your interest rate changes when your adjustment period ends. The lender can raise your rate if its fully indexed rate is higher than your current mortgage rate. If the benchmark rate goes down, the lender might lower its fully indexed rate and, accordingly, your rate.
Rate caps put a boundary on how much your interest rate can change. Caps can be periodic, which limits how much the rate can increase at each readjustment period. There is also a lifetime cap, which nearly all ARMs are required to have.
It’s important that borrowers examine their individual situations and decide whether or not an ARM is the best fit.
ARMS Can Be a Great Choice
An adjustable-rate mortgage offers a competitively low interest rate for those who can avoid or minimize the impact of a potentially rising rate in the future.
If you plan to sell the property or refinance before the first adjustment period or before future interest charges outweigh early interest savings, you could save money.
An ARM also can be a good option for first-time homebuyers who expect an income boost in a few years. For example, a military family on limited deployment or a medical student who will become a doctor might be a candidate for an ARM.
ARM Loans Are Not for Everyone
However, an ARM is not the best choice for every borrower because of the potential for rate increases over time. ARMs can be complex and terms can be difficult to understand, so borrowers should be fully familiar with their benefits and drawbacks before moving forward.
You may be surprised at how much the payment can increase in the future or at the challenges you could face in selling or refinancing the property. There are several ways to achieve negative amortization on an ARM, resulting in a loan balance larger than what you originally borrowed.
One selling point of ARMs is that, technically, the rate could go down. But because an ARM tends to start low, increases are typically inevitable.
The four key factors for choosing the best adjustable-rate mortgage lender are:
Product offerings. The best lender will offer products with the terms and features that meet your needs, whether that be conventional, FHA or VA loans.
Interest rates. A low interest rate can save you tens of thousands of dollars over the life of your loan. Even a fraction of a percent can drive significant savings – or costs.
You might want to discuss the pros and cons of various ARM options with the lender, including:
- 5/1 ARMs.
- 7/1 ARMs.
- 10/1 ARMs.
- Interest-only ARMs.
Closing costs. Lenders have some flexibility when it comes to many closing costs. Generally, lower upfront costs are associated with higher interest rates. If you are looking for a loan with as little out-of-pocket cost as possible, you may face higher costs overall and vice versa.
Customer service. As with any major purchase, find out what other customers say. You may be tied to this lender for years or decades, so choose one that has demonstrated an ability to provide good customer service.
U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. For mortgage lenders, we take into account each company’s customer service ratings, interest rates, loan product availability, minimum down payment, minimum FICO score and online features.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
To recap, here are the picks:
5/1 ARM Lenders of March 2024
An adjustable-rate mortgage is like any other mortgage: A lender pays a seller for the home you want to buy, and you make regular monthly mortgage payments to the lender until the loan is paid off. But unlike with a traditional fixed-rate mortgage, the interest rate changes periodically, per the terms in the loan contract.
Most adjustable-rate mortgages start with a competitive initial fixed-rate period, often with a lower interest rate than what’s available on fixed-rate mortgages. When the period ends, the interest rate changes at predetermined intervals, according to the benchmark rate the loan follows.
The four key factors for choosing the best adjustable-rate mortgage lender are:
Product offerings. The best lender will offer products with the terms and features that meet your needs, whether that be conventional, FHA or VA loans.
Interest rates. A low interest rate can save you tens of thousands of dollars over the life of your loan. Even a fraction of a percent can drive significant savings – or costs.
You might want to discuss the pros and cons of various ARM options with the lender, including:
- 5/1 ARMs.
- 7/1 ARMs.
- 10/1 ARMs.
- Interest-only ARMs.
Closing costs. Lenders have some flexibility when it comes to many closing costs. Generally, lower upfront costs are associated with higher interest rates. If you are looking for a loan with as little out-of-pocket cost as possible, you may face higher costs overall and vice versa.
Customer service. As with any major purchase, find out what other customers say. You may be tied to this lender for years or decades, so choose one that has demonstrated an ability to provide good customer service.
Rate caps put a boundary on how much your interest rate can change. Caps can be periodic, which limits how much the rate can increase at each readjustment period. There is also a lifetime cap, which nearly all ARMs are required to have.
