Adjustable-Rate Mortgages

Start with a lower initial mortgage rate.

Lower initial rate

Initial payment flexibility

Limits on rate changes

A flexible rate for your homebuying plans.

Your plans may change long before a 30-year mortgage ends. An adjustable-rate mortgage, or ARM, provides a fixed interest rate for an initial period followed by a time when the rate may adjust periodically.

The initial rate may be lower than the rate available with a comparable fixed-rate mortgage, potentially providing a lower principal-and-interest payment during the introductory period. A Michigan First Mortgage Loan Officer can help you compare the initial benefit with the possibility of future rate and payment changes.

How does an Adjustable-Rate Mortgage work?

An adjustable-rate mortgage combines an initial fixed-rate period with an adjustable period.

During the introductory period, your interest rate remains the same. After that period ends, the rate may increase or decrease at scheduled intervals based on the terms of your mortgage and changes in the applicable market index.

If your interest rate changes, your monthly principal-and-interest payment generally changes as well. Property taxes, homeowners insurance and other amounts included in your total monthly payment may change independently of your mortgage rate.

Every ARM has specific terms that establish:

How long the initial rate remains fixed
How often the rate may adjust afterward
The margin added to the index
Caps on how much the interest rate can change at each adjustment
A cap on the maximum rate your loan could adjust to over the life of the loan

Your Loan Estimate and mortgage disclosures will provide the exact terms for the ARM you are considering.

Understanding ARM terms

ARM names typically use two numbers to describe the loan’s basic structure.

The first number identifies how many years the initial interest rate remains fixed. The second identifies how often the rate may adjust after that period.

For example, with a 5/6 ARM:

The initial rate remains fixed for five years
The rate may adjust once every 6 months after the fixed period of time

The ARM options available through Michigan First should be listed according to the current product lineup. A Mortgage Loan Officer can explain how each fixed period and adjustment schedule works.

How is the adjustable rate determined?

After the introductory period, an ARM rate is generally calculated using two components: an index and a margin.

Index
The index is a benchmark interest rate that changes with market conditions.

Margin
The margin is a set number of percentage points established in your mortgage agreement. Unlike the index, it does not change during the life of the loan.

When the rate adjusts, the index and margin are used to calculate the new interest rate, subject to the mortgage’s applicable rate caps:

Index + Margin = Adjusted Interest Rate, subject to rate caps

Once adjustments begin, changes are driven by the loan terms and applicable index - not by changes in your personal credit or income. The CFPB provides a helpful explanation of ARM indexes and margins.

What are ARM rate caps?

Rate caps limit how much an adjustable interest rate can change. They do not guarantee that your rate or payment will remain the same once the introductory period ends.

An ARM generally includes three types of caps:

Initial Adjustment Cap
Limits how much the interest rate may change the first time it adjusts after the fixed-rate period.

Periodic Adjustment Cap
Limits how much the interest rate may change during each later adjustment.

Lifetime Adjustment Cap
Limits how much the interest rate may increase over the life of the mortgage.

The exact caps vary by loan. Two ARMs with the same initial rate could create different future payment risks if their adjustment caps differ. The Consumer Financial Protection Bureau recommends comparing all three caps, even if you currently expect to move or refinance before the first adjustment.

When could an ARM make sense?

An adjustable-rate mortgage may be worth considering if:

You expect to sell the home before or soon after the initial fixed-rate period ends
You plan to refinance before the adjustable period, while understanding that refinancing is not guaranteed
You want a potentially lower initial principal-and-interest payment
You expect your income or available cash flow to increase
You are comfortable with the possibility of future payment changes
You understand how the index, margin and rate caps affect the loan
The initial-rate benefit supports your plans enough to justify the future uncertainty

An ARM should still be evaluated based on the possibility that your plans - or market conditions - could change. You may remain in the home longer than expected, and refinancing may not be available or financially beneficial when the introductory period ends.

Adjustable-Rate Mortgage

An ARM may offer a lower initial interest rate for a set period. After that period, the rate and principal-and-interest payment may increase or decrease.

An ARM may appeal to someone who expects to move within several years or is comfortable accepting future rate uncertainty in exchange for the initial terms.

Fixed-Rate Mortgage

A fixed-rate mortgage maintains the same interest rate for the full repayment term. The monthly principal-and-interest payment remains predictable, although taxes, insurance and other charges may change.

A fixed-rate mortgage may appeal to someone who expects to remain in the home longer or prioritizes consistent principal-and-interest payments.

A Mortgage Loan Officer can provide estimates for both options so you can compare the initial payment, potential future payment and overall borrowing costs.

Explore Fixed-Rate Mortgages

What to consider before choosing an ARM

The introductory rate is only one part of an adjustable-rate mortgage. Before selecting an ARM, consider:

How Long You May Keep the Home

Compare your expected homeownership timeline with the length of the fixed-rate period. Leave room for the possibility that you may stay longer than originally planned.

Your Payment After an Adjustment

Ask what your principal-and-interest payment could become after the first adjustment and at the maximum permitted rate.

Your Ability to Absorb an Increase

Consider whether your budget could support a higher payment if rates rise.

Your Refinancing Assumptions

Refinancing before an adjustment may be possible, but it is not guaranteed. Future rates, property value, equity, credit, income and lending requirements will affect your options.

The Rate Caps

Review the initial, subsequent and lifetime caps - not only the introductory rate.

The Total Cost of the Mortgage

Compare closing costs, expected interest, payment changes and the amount you could pay over the period you expect to keep the loan.

The Adjustable-Rate Mortgage process

Discuss Your Plans

Tell your Mortgage Loan Officer about your budget, expected time in the home and priorities for your monthly payment.

Compare Mortgage Options

Review available ARM structures alongside fixed-rate options. Compare the introductory rates, payments, closing costs and potential future adjustments.

Complete Your Application

Provide the required information about your income, employment, assets, debts and intended property.

Review the ARM Disclosures

Pay particular attention to the fixed-rate period, adjustment schedule, index, margin, rate caps and examples of how your payment could change.

Complete the Mortgage Review

Your application and property proceed through the applicable appraisal, title, underwriting and approval stages.

Review Your Final Terms and Close

Before closing, confirm the initial rate and payment along with the terms that will govern future adjustments.

Find a mortgage that fits your plans

An adjustable-rate mortgage can provide a lower initial rate and greater short-term payment flexibility, but the future adjustment terms matter just as much as the introductory offer.

A Michigan First Mortgage Loan Officer can help you compare adjustable- and fixed-rate options and understand how each one could affect your payment now and in the future.