July 3, 2022

Best 5/1 ARM Loans of 2021 | U.S. News

Adjustable-rate mortgages are home loans with an interest rate that changes over time. This type of home loan can be risky, but with a lower initial interest rate than fixed-rate mortgages, adjustable-rate mortgages can be a good option if you plan to sell or refinance within a few years, before the lower interest rate adjusts.

The right home loan can deliver thousands of dollars in savings. This guide can help you understand adjustable-rate mortgages and find the right lender for your homebuying needs.

  • What is an adjustable-rate mortgage?
  • How do adjustable-rate mortgages work?
  • When does an adjustable-rate mortgage make sense?
  • How can you choose the best adjustable-rate mortgage lender?

What Are the Best Adjustable-Rate Mortgage Lenders of 2021?

PNC Bank

3% Min. Down Payment
Not disclosed Min. Credit Score

Chase

3% Min. Down Payment
620 Min. Credit Score

Lender

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3% Min. Down Payment
Not disclosed Min. Credit Score

Lender

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3% Min. Down Payment
620 Min. Credit Score

Best for bad credit

Carrington Mortgage Services makes a range of mortgages, including refinancing, available to borrowers nationwide. The company, which provides conventional and government-backed mortgages, has funded $22 billion in home loans since 2011.

Before You Apply

  • Mortgage types: conventional, FHA, VA, USDA, ARM, Carrington Flexible Advantage, first-time buyers, refinancing
  • Minimum FICO credit score: 500
  • Maximum loan amount: $2.5 million
  • Better Business Bureau rating: A+

Best Features

  • Applicants with credit scores as low as 500 are accepted for some products.

  • Conventional loans are offered with down payments as low as 3%.

See full profile

Best for product availability

Fairway Independent Mortgage Corp. is based in Madison, Wisconsin, and has funded billions of dollars in loans since the company began in 1996 – and more than $58 billion in 2020 alone. The lender offers several mortgage products, including conventional, Federal Housing Administration, U.S. Department of Agriculture, U.S. Department of Veterans Affairs and refinancing loans. Fairway Independent Mortgage also provides jumbo loans for home purchases in high-cost markets, renovation loans, adjustable-rate mortgages and reverse mortgages. Fairway is an independent mortgage company and serves as a mortgage broker and direct lender.

Before You Apply

  • Mortgage types: fixed rate, ARM, conventional, USDA/Rural Development, FHA, VA, jumbo, refinance, renovation, reverse mortgage
  • Minimum FICO credit score: 580
  • Maximum loan amount: undisclosed
  • Better Business Bureau rating: A+

Best Features

  • The selection of mortgages includes VA and USDA loans, which often have no down payment requirements.

  • The company has an A+ customer service rating with the Better Business Bureau.

  • Renovation loan options include the HomeStyle Renovation Loan, which combines the cost of remodeling and the mortgage into one loan.

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Best for consumers with credit scores between poor and good

NBKC Bank is a Kansas-based mortgage lender. It originates home loans in all 50 states.

Before You Apply

  • Mortgage types: conventional, fixed rate, ARM, FHA, refinance, VA, FHA Streamline Refinance, Refi Plus, VA Streamline Refinance
  • Minimum FICO credit score: 620
  • Maximum loan amount: Not disclosed
  • Better Business Bureau rating: A+

Best Features

  • Borrowers with fair credit may qualify.

  • It features a simple online application process.

  • VA loan borrowers aren’t charged lender fees.

See full profile

Best for product selection

Guild Mortgage, founded in 1960, specializes in home loans and serves borrowers nationwide. The lender’s full suite of products includes conventional and government-backed mortgages and home renovation loans.

Before You Apply

  • Mortgage types: conventional, FHA, VA, USDA, ARM, refinancing, renovation, jumbo
  • Minimum FICO credit score: 620
  • Maximum loan amount: $2 million
  • Better Business Bureau rating: A+

Best Features

  • A broad range of mortgage products are offered.

  • Special mortgage programs for first-time buyers and manufactured homebuyers are available.

See full profile

Best for VA loans

Veterans United Home Loans provides mortgages to veterans and military families in all 50 states and Washington, D.C., and specializes in VA loans.

Before You Apply

  • Mortgage types: VA, VA jumbo, refinance
  • Minimum FICO credit score: 640
  • Maximum loan amount: $1.5 million
  • Better Business Bureau rating: A+

Best Features

  • No down payment or PMI are required.

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Best online bank for customer service

Ally Bank is a Detroit-based online bank. Ally offers traditional banking products and services, such as conventional mortgages, as well as refinance loans and jumbo home loans.

Before You Apply

  • Mortgage types: fixed rate, ARM, home equity loans, refinancing, HomeReady for first-time homebuyers
  • Minimum FICO credit score: 620
  • Maximum loan amount: $4 million
  • Better Business Bureau rating: A+

Best Features

  • A program is available for first-time homebuyers.

  • Existing Ally customers can get a closing cost discount.

See full profile

Best for large loan amounts

Bank of America serves roughly 66 million customers in all 50 states. The lender offers conventional, Federal Housing Administration, Department of Veterans Affairs and jumbo loans, as well as home equity lines of credit and mortgage refinancing.

Before You Apply

  • Mortgage types: fixed rate, Affordable Loan Solution, FHA, VA, ARM, home equity line of credit, fixed-rate refinancing, FHA refinancing, VA refinancing, cash-out refinancing, adjustable-rate refinancing, jumbo
  • Minimum FICO credit score: Not disclosed
  • Maximum loan amount: $2.5 million
  • Better Business Bureau rating: A+

Best Features

  • Bank of America has a wide variety of mortgage products.

  • The lender offers origination fee discounts for qualifying Bank of America and Merrill Lynch clients.

  • Home equity lines of credit have no annual, application or cash advance fees or closing costs.

  • Bank of America offers a first-time homebuyer program.

See full profile

Best for low down payment

PNC Bank is one of the largest U.S. banks, serving more than 8 million customers in all 50 states. PNC offers most types of mortgages.

Before You Apply

  • Mortgage types: fixed rate, FHA, VA, USDA, ARM, home equity line of credit, refinancing, medical professional mortgage program, jumbo, PNC Community
  • Minimum FICO credit score: Not disclosed
  • Maximum loan amount: $5 million
  • Better Business Bureau rating: A+

Best Features

  • Multiple types of mortgages are available.

  • Some mortgage options require no or low down payments.

  • PNC supplies an online home ownership cost tool.

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Best for no down payment

Alliant Credit Union is a nonprofit financial cooperative. The credit union serves customers in all 50 states. Mortgage products include conventional, jumbo and refinancing loans, and home equity lines of credit.

Before You Apply

  • Mortgage types: Traditional, ARM, refinancing, home equity line of credit, Alliant Advantage Mortgage
  • Minimum FICO credit score: 620
  • Maximum loan amount: $2.5 million
  • Better Business Bureau rating: A+

Best Features

  • No-down-payment mortgages are available for first-time homebuyers with excellent credit.

  • Mortgages are available to borrowers with FICO credit scores as low as 620.

See full profile

Best for online service

Caliber Home Loans of Coppell, Texas, offers mortgage and home equity products nationwide. Options include conventional, adjustable-rate, refinancing, Federal Housing Administration, U.S. Department of Agriculture and Veterans Affairs loans. Caliber has been in business since 2008, and is focused on home lending products.

Before You Apply

  • Mortgage types: conventional, FHA, VA, USDA, ARM, refinancing, bond, renovation, Freddie Mac HomeOne, Freddie Mac Home Possible, Fannie Mae HomeReady
  • Minimum FICO credit score: 620
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A

Best Features

  • The first-time homebuyer program HomeOne can require a down payment of as little as 3% and borrowers may qualify with a minimum 620 credit score.

  • Government-insured loans including Federal Housing Administration, Veterans Affairs, and United States Department of Agriculture programs are available.

See full profile

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What Is an Adjustable-Rate Mortgage?

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.

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).

An interest-only ARM is an adjustable-rate mortgage that only requires interest payments (no principal payments) during the initial payment period. During the initial payment period, the loan balance does not go down. At the end of the initial payment period, the loan is amortized based on the remaining term, and the required monthly mortgage payment increases substantially.

A payment-option ARM is an adjustable-rate mortgage in which the borrower can choose from multiple payment options. Usually, the options are:

  • Standard principal and interest payment. The loan balance goes down with each payment.
  • Interest-only payment. The loan balance remains the same with each payment.
  • Limited payment. The loan balance increases with each payment.

If you make a payment that does not cover the interest, the unpaid interest is added to the loan balance and amortized. Payment-option ARMs are recalculated at predetermined intervals, such as every five years, or if the loan balance reaches a preset limit, such as 125% of the original loan balance. After recalculating the loan, the lender will set a required monthly payment to guarantee you will pay off the loan by the end of the remaining loan term.

With a convertible ARM feature, you can pay a conversion fee upfront so that the loan can be converted to a fixed-rate mortgage after a period of time. For this product, the initial interest rate may be a little higher than the rate on a nonconvertible ARM. The rate at conversion will be based on current mortgage rates and may be higher than the rate available for a new fixed-rate mortgage.

Adjustable-rate mortgages are available from home loan programs through the Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture as well as for conventional and jumbo loans. Typical loan terms are 15- and 30-year, but 10- and 20-year terms are also common.

How Do Adjustable-Rate Mortgages Work?

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. 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.

An ARM interest rate can be based on a major index rate – such as the one-year Treasury constant maturity rate; the 11th District Cost of Funds Index, or COFI; or the London Interbank Offered Rate, or Libor – or it may be the lender’s own cost of funds index. The lender chooses its own index. The lender adds a margin to the benchmark rate to calculate your interest rate.

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.

Caps set the boundaries on how much your interest rate can change. An interest rate cap can be periodic, limiting how much the rate can rise at each readjustment period, or lifetime, restricting your interest rate for the life of the loan. Nearly all adjustable-rate mortgages are required to have a lifetime cap.

For example, if your initial rate is 4% with a 2% periodic rate cap and the fully indexed rate is 7% at the time of your recast, your rate will only rise to 6%.

Payment caps limit the amount your monthly payment can increase, regardless of how much the benchmark rate increases. While it keeps your monthly payment amount in check, it doesn’t stop interest from building. Any unpaid interest will be added to your outstanding loan balance.

When Does an Adjustable-Rate Mortgage Make Sense?

An adjustable-rate mortgage can be a good choice when it offers a competitively low interest rate and you can avoid or minimize the impact of a potentially rising rate in the future.

“A major question is the borrower’s time horizon,” says Jack Guttentag, author of The Mortgage Professor blog. 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.

“Another circumstance in which an ARM might be preferable, even when the time horizon is indefinite,” says Guttentag, “would be where the monthly payment difference is very important now, but in the future the borrower expects her income to increase significantly.”

An ARM can be a good option for first-time homebuyers who plan to refinance or sell their home or 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.

However, an ARM is not the best choice for every borrower because of the potential for rate increases over time. ARMs can be complex, so borrowers should fully understand their benefits and drawbacks before moving forward.

“Taking an ARM now with the goal of refinancing at the end of the first adjustment period can be complicated,” says Matthew Ribe, senior director of legislative affairs and corporate secretary for the National Foundation for Credit Counseling.

When Is an Adjustable-Rate Mortgage a Bad Idea?

The financial advantages of an ARM are generally realized during the earlier years of the loan, so an ARM is not a good choice for a borrower who intends to own the property beyond that early period and who does not plan to (or can’t) refinance to a lower-cost loan.

ARM terms can be difficult to understand. 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.

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, especially for loans that originate in an already-low-interest market. In some loans, the rate is not allowed to drop below a predetermined minimum, even if the benchmark rate goes lower.

There are several ways to achieve negative amortization on an ARM, resulting in a loan balance larger than what you originally borrowed.

Before considering an ARM, keep in mind that you can’t get something for nothing. Banks make ARM loans because they believe loan rates will rise enough to offset your savings in those initial years. The unpredictability of an ARM makes it inherently riskier than fixed-rate mortgages, and that risk is your trade-off for favorable starting terms.

How Can You Get the Lowest Mortgage Rate?

Your home loan’s interest rate influences your monthly payment and how much the loan costs over time. The lower your interest rate, the lower your monthly mortgage payment and overall cost of borrowing, so it pays to shop around for the lowest mortgage rate you can get.

Many factors influence mortgage interest rates, including benchmark rates, borrower demand and your credit score. Take these steps to get the lowest mortgage rate possible:

  • Examine your credit history and finances.
  • Choose the right loan and rate type.
  • Compare mortgage rates with multiple lenders.

Advertised rates are best-case scenarios, offered to borrowers with the strongest applications. Your credit score, size of down payment and debt-to-income ratio (how much of your gross income goes to debt payments) have a major influence on the loan rates you’re offered. Before you start rate shopping, check your credit history for errors and identify areas to improve.

Loan rates vary based on loan type and terms. For example, the interest rate for a 30-year fixed-rate mortgage isn’t likely to be the same as a 30-year ARM. Compare mortgage rates for different programs to see which offers the best rate, as these can fluctuate depending on demand.

With the current low-interest-rate environment, there’s heavy demand for 30-year fixed-rate mortgages as consumers lock in low long-term rates. “There’s a lower demand for adjustable rates, so in turn, the rates are higher,” says Rob Sickler, loan originator with Mortgage Network Solutions.

Compare mortgage rates with a few lenders so you can select the one that offers the lowest mortgage rate. You can do this by prequalifying, which requires a soft credit pull that doesn’t affect your credit score.

As you research loan options, you may find that a loan with a low interest rate can keep you under the debt-to-income ratio limit set by the lender.

“The lender uses this initial interest rate to decide whether you have enough income to qualify for the mortgage, even though the rate usually rises at the end of the initial adjustment period,” says Guttentag. That could translate to an unaffordable monthly mortgage payment if your income does not rise.

How Can You Choose the Best Adjustable-Rate Mortgage Lender?

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. Compare mortgage rates from multiple lenders to find the best deal.

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. For example, some, but not all, charge an origination fee. 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.

View More Best Adjustable-Rate Mortgage Lenders

Best for low costs

Chase, one of the nation’s largest banks, offers mortgages, refinance loans and home equity loans for qualified borrowers.

Before You Apply

  • Mortgage types offered: conventional, ARM, conforming, FHA, DreaMaker, VA, jumbo, refinancing
  • Minimum FICO credit score: 620
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • Down payments as low as 3% are accepted.

  • Fixed- and adjustable-rate mortgages are available.

See full profile

Best for fair credit

Flagstar offers banking and lending products in every state. Borrowers can select from conventional or government-backed mortgages, such as FHA, VA and U.S. Department of Agriculture loans, and opt for adjustable-rate mortgages. Other choices include home equity loans and lines of credit.

Before You Apply

  • Mortgage types: conventional, VA, ARM, FHA, USDA, jumbo, refinance, home equity
  • Minimum FICO credit score: Not disclosed
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • Flagstar Bank provides a broad selection of mortgages and home equity loans.

  • Some mortgages require no or a low down payment.

  • Borrowers can apply for loans online.

See full profile

Best for digital mortgages

LoanDepot is an online lender operating in all 50 states with more than 200 in-person branches. The company was founded in 2010 and is headquartered in Southern California. LoanDepot offers Federal Housing Administration and Department of Veterans Affairs loans, as well as home equity and refinancing loans.

Before You Apply

  • Mortgage types: refinance, jumbo, hybrid ARM, fixed rate, HARP, VA, FHA, 203k loan
  • Minimum FICO credit score: 620
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • LoanDepot mortgages have a lifetime guarantee, which means if you ever decide to refinance an existing LoanDepot loan, the company will waive the lender fees and reimburse appraisal fees.

  • The company offers a variety of mortgage products.

  • It’s licensed in all 50 states.

See full profile

Best for digital customer care

PrimeLending is a Dallas-based mortgage lender with several mortgage loan options, including conventional loans, jumbo loans, government-backed loans and refinance loans. The lender is a subsidiary of PlainsCapital Bank.

Before You Apply

  • Mortgage types: fixed rate, ARM, conventional, cash-out refinance, refinance, jumbo, FHA, VA, USDA, new construction, interest rate reduction refinance loan
  • Minimum FICO credit score: 640
  • Maximum loan amount: undisclosed
  • Better Business Bureau rating: A+

Best Features

  • Homebuyers can choose from a variety of mortgage products.

  • Home loans are available nationwide.

  • Down payment and closing cost assistance is available.

See full profile

Best for conventional mortgage

Citizens Bank is a regional bank based in Providence, Rhode Island. It offers traditional banking services and products, including home loans and mortgage refinance loans.

Before You Apply

  • Mortgage types: conventional, ARM, refinance, HELOC, jumbo, fixed rate
  • Minimum FICO credit score: undisclosed
  • Maximum loan amount: undisclosed
  • Better Business Bureau rating: A+

Best Features

  • Citizens Bank provides a homebuying service with rewards for borrowers in select states.

  • Homebuyers can get an interest rate discount for qualifying automatic payments.

  • Borrowers can apply online.

See full profile

Best for government loans

Founded in 2008, PennyMac is a national mortgage lender with more than $402 billion in loans serviced. PennyMac offers a range of home loans, including conventional, Federal Housing Administration, Veterans Affairs and investment property mortgages.

Before You Apply

  • Mortgage types: conventional, FHA, VA, ARM, refinancing
  • Minimum FICO credit score: 620
  • Maximum loan amount: $765,600
  • Better Business Bureau rating: A+

Best Features

  • PennyMac accepts a 50% debt-to-income ratio for conventional loans in some instances.

  • Online capabilities include a 24/7 access center and email status updates.

See full profile

Best for low APR

New American Funding is a national mortgage lender with a variety of home loan options. The lender has processed more than $27 billion in mortgages.

Before You Apply

  • Mortgage types: ARM, cash-out refinance, conventional, FHA, HELOCs, jumbo, reverse, USDA and VA
  • Minimum FICO credit score: 620
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • Provides multiple mortgage options, including low and no down-payment loans

  • Offers fixed- or adjustable-rate mortgages

See full profile

Best for: Borrowers who want an online experience plus top-notch customer service

Quicken Loans is a nationwide mortgage lender with several mortgage options. Known for customer service, the lender has an A+ Better Business Bureau rating and received a rating of five (among the best) in the 2018 U.S. Primary Mortgage Origination Satisfaction Study.

Highlights:

  • Mortgage types offered: ARM, FHA, VA, Refinancing (FHA), USDA, Conventional, Refinancing (conventional)
  • Minimum FICO credit score: 580 (FHA), other loans vary
  • Maximum debt-to-income ratio: 60%
  • J.D. Power satisfaction rating: Five out of five

Best Features

  • Complete loan process available online.

  • Wide variety of mortgage products.

  • Good customer service ratings.

See full profile

Best for short-term loans

U.S. Bank is a national bank based in Minneapolis that provides various banking products and services as well as a handful of mortgage options. The lender offers conventional loans, Federal Housing Administration loans, Department of Veterans Affairs loans, jumbo loans and more.

Highlights:

  • Mortgage types: conventional, refinancing, fixed-rate, ARM, Federal Housing Administration loans, Department of Veterans Affairs loans, jumbo
  • Minimum FICO credit score: undisclosed
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A

Best Features

  • Provides mortgage loans nationwide.

  • Allows you to apply online without first speaking with a loan officer.

  • Assists U.S. Bank customers with closing costs.

See full profile

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