The LO Down - ARMS are Back!

Posted by Sawyer Jones on July 13 2022

With the rise in mortgage interest rates, more and more consumers are looking for ways to bring affordability back into the home-buying picture.  One product to consider is ARM loans, or Adjustable Rate Mortgages.  These were very popular before the market crash of 2008, but have gotten a bad rap since then, due to the nature of fluctuating interest rates. 


Adjustable Rate Mortgages use a different method for determining the interest rate than conventional loans.  Specifically, they are tied to one of three major indexes.  The 1-yr T-Bill, the Cost of Funds Index, or the Secured Overnight Finance Rate.  The calculation of that interest rate would look something like this:

ARM loans typically have a fixed rate period, anywhere from 3 years to 10 years depending on the product you choose.  So for borrowers who only plan to live in the home for, say 7 years, then an ARM loan offers some options that are worth considering.

Here is a comparison of typical conventional mortgage payment and an ARM payment:

In this scenario, the conventional loan would have a fixed principal and interest payment for 30 years.  However, the ARM loan would have a fixed payment for the first 7 years, then change, up or down depending on the performance of the index it is tied to, every 1- year after that. 

Now, ARM loans aren’t for everyone.  But for borrowers planning to stay in their home for only a short amount of time, it can be a great way to purchase or even refinance a home at a more affordable rate. 


SOFR index of 2.25% +  set margin of 2.50% = fully indexed rate of 4.75%

$500,000 loan amount

  • Conventional rate of 5.875%
  • Principal/interest = $2,958 per month
  • 7/1 ARM rate of 4.75%
  • Principal/interest = $2,608 per month  (a savings of $350 a month)


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Tags: Mortgage, REALTORS



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