3-Year ARM A Guide to Affordable Homeownership
7 minute read
October 20, 2022


If you’re like most people, you like saving money—especially in a tight economy.

As a homeowner, saving money can be as simple as getting the lowest possible mortgage rate.

A 3-year ARM offers lower interest rates than most fixed-rate products and can potentially save homeowners tens of thousands of dollars over the life of the loan.

See if a 3-year ARM will work for you.

What’s in this article?

What is a 3-year ARM loan?
How does a 3-year ARM work?
Who are 3-year ARMs good for?
About ARM caps
3-year ARM alternatives
3-year ARM mortgage rates
Start your 3-year ARM

What is a 3-year ARM loan?

An ARM (adjustable-rate mortgage) is a home loan that starts off with a fixed interest rate that change later during the life of the loan.

For instance, a 3-year ARM loan gives homeowners the security of a fixed rate for three years, after which their interest rate can fluctuate.

How does a 3-year ARM work?

All ARMs begin with a fixed-rate term and switch to an adjusting interest rate structure. With a 3-year ARM, homeowners pay a fixed, unchanging interest rate for the first three years of their mortgage—regardless of how high-interest rates go. Once the three years are up, the interest rate can adjust—usually annually or twice per year—until the loan is paid off.

Homeowners can enjoy three years of low mortgage interest rates, no matter how high market rates climb.

Interest rates are tied to market rates. A little-known benefit or ARMs: if market rates drop during the adjustable period, so does your payment.

A 3-year ARM is a 30-year loan. There are no balloon payments required. It’s fixed for three years, then the rate adjusts for 27 years, at the end of which the loan is paid off. When a 3-year ARM makes sense for some homebuyers

Who should consider a 3-year ARM?

One of the benefits of an adjustable-rate mortgage is the flexibility it offers. Most 3-year ARMs offer low interest rates and lower monthly payments during the fixed-rate period.

That makes a 3-year ARM an excellent option for homebuyers planning to sell the home or refinance within three years. Some other candidates for this loan product are as follows.

  • Your income will rise within three years and will be able to afford higher payments at that time
  • You will receive an inheritance or otherwise be able to pay down the loan significantly within three years
  • You believe fixed mortgage rates will fall within three years, at which point you can refinance
  • You will only be moving to a new city for work within a few years

ARM rate caps mean protection for the borrower

Most 3-year ARMs come with a rate cap that limits how much interest rates can go up or down. ARM rate caps come in three forms: an initial rate cap, a periodic rate cap, and a lifetime rate cap.

For instance, assume a 3-year ARM that comes with 5/2/5 cap structure.

  • Initial interest rate cap: Sets a limit on how much your interest rates can jump once the initial fixed-rate period is over. In this case, 5%.
  • Periodic rate cap: Defines the maximum amount your mortgage interest rate can move up from after each adjustment period. 2% for this example.
  • Lifetime interest rate cap: The lifetime cap establishes a ceiling, limiting how much your interest rate can rise during the ‘lifetime’ of your loan. This loan comes with a 5% lifetime cap.

ARM caps protect you as a homeowner. You know your rate and payment can never rise above a certain amount.

If you start at a 5% interest rate with 5/2/5 caps, your payment could never rise above 10%.

On a $300,000 loan, the maximum increase would be around $1,000 per month if the rate jumped to its highest level. Not cheap, but perhaps manageable until you could refinance.

And, keep in mind that the ARM doesn’t have to rise this much. It might carry a similar interest rate after the fixed period or even drop. It all depends on market rates at the time.

Because of rate caps, ARM borrowers can rest a little easier if they hold the loan past the fixed-rate period.

3-year vs. 5-year ARM

A good general rule when considering ARMS is this: The shorter an ARM’s fixed-rate period, the lower the interest rate it can offer. So a 3-year ARM will likely be less expensive than a 5-year.

But there’s a trade-off: the 5-year ARM gives you more time to refinance or sell the home before the adjustment period.

Examine your goals and how long you’ll keep the home and mortgage. If you plan to keep the loan only a few years, a 3-year ARM is likely better than the 5-year version.

Check your 3-year ARM eligibility.

3-year ARM vs. 30-year fixed

These loans offer homeowners more manageable monthly payments during the first three years of their loan when the interest rate is fixed. They typically have lower interest rates compared to 30-year fixed-rate mortgages.

Following is a snapshot on how much you might save on a $350,000 mortgage over the first three years.

Loan type3-year ARM30-year fixed
Example interest rate5%*7%*
Principal + interest payment ($350k loan)$1,879*$2,328*
Cost in first 3 years$67,644$83,808
Monthly savings$449n/a
3-year savings$16,164n/a

*Rates and rate spread shown are for example purposes only. Your rates will be different. Payments do not include taxes, insurance, or HOA dues.

Homeowners who sell or refinance before the end of the 3-year fixed period can sidestep the conversion of the loan to a fixed-rate mortgage.

30-year fixed mortgages offer a single interest rate for the entirety of the loan, offering rate stability but at a much cost rate than a 3-year ARM.

More 3-year ARM alternatives

Standard adjustable-rate mortgages

Interest-only adjustable-rate mortgages

3-Year ARM rates

Today’s high-interest rates and rising home costs can make saving money a priority for many homeowners. 3-year ARM rates are lower for the first three years than most other mortgage products.

3/1 ARM vs. 3/6 ARM

A 3/1 ARM offers borrowers a locked-in interest rate for the first three years of their mortgage. Once the introductory rate period is finished, homeowners with 3/1 adjustable-rate mortgages can expect rate changes every one year for the remainder of their mortgage.

A 3/6 ARM offers borrowers a locked-in interest rate for the first three years. Once it converts to an adjustable interest rate, homeowners can expect a rate adjustment every six months for the remainder of their loan.


When can you refinance out of a 3-year ARM?

Homeowners can often refinance out of their 3-year ARM as quickly as six months, depending on lender requirements. Some mortgage lenders allow owners to refinance without a waiting period.

Can you refinance into a 3-year ARM from a 30-year fixed?

Homeowners can refinance into a 3-year ARM from a 30-year fixed mortgage and get lower interest rates for the first three years of their new mortgage. Those struggling to pay for their mortgages could consider reducing their rate with a 3-year ARM.

What is a 3-year jumbo ARM?

3-year ARMs for loan amounts above conforming mortgage loan limits are called jumbo loans. In 2022, the conforming loan limit is $647,200 in most areas of the country, but up to $970,800 in expensive locations. These limits will likely rise in 2023. A jumbo ARM can give you a loan above these amounts, even before the increase in the new year.

Why are ARMs sometimes called hybrid ARMs?

ARMs are made up of two parts—a fixed-rate period at the start and an adjustable-rate period after. They are sometimes called hybrid ARMs because they are a hybrid of fixed rates and adjustable rates. A true adjustable-rate mortgage would come with a rate that starts adjusting immediately after closing the loan.

3-year ARM: Become a homeowner sooner

Homeowners interested in saving money, relocating, or refinancing before the end of the fixed rate term can often benefit from a 3-year ARM’s lower interest rate.

See if you’re eligible for a 3-year ARM or another low-interest-rate loan product.

Check your 3-year ARM eligibility and payment.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.

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