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3/1 ARM Mortgage Rates

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Quick Introduction to 3/1 ARM Mortgages

If you take on a 3/1 adjustable-rate mortgage (ARM), you’ll have three years of fixed mortgage payments and a fixed interest rate followed by 27 years of interest rates that adjust on an annual basis. Once the three-year introductory period ends, interest rates can either go up or down depending on what’s happening to the major mortgage index that the mortgage is connected to.

Today's 3/1 ARM Mortgage Rates

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National Mortgage Rates

Source: Freddie Mac Primary Mortgage Market Survey, SmartAsset Research
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3/1 Adjustable-Rate Mortgage Rates

Hybrid mortgages like 3/1 ARMs provide a variety of benefits. For one, borrowers initially have access to mortgage rates that are usually lower than the ones available to people interested in 15-year or 30-year fixed-rate mortgages. At the same time, 3/1 ARMs can be considered risky home loans because homeowners don’t know exactly how much their interest rates will rise after the initial fixed-rate period ends.

Historical 3/1 ARM Rates

3/1 ARM rates have fallen over the years. In late December 2007, the average mortgage rate for the 3/1 ARM was around 6.09%. In late July 2016, the national mortgage rate for the 3/1 ARM was around 3.02%, on average.

3/1 Adjustable-Rate Mortgage Rates

YearAverage Annual Mortgage Rate
20104.05%
20113.37%
20123.04%
20133.02%
20142.96%
20152.96%
20163.01%
Note: The annual average mortgage rates were calculated using monthly mortgage rate averages reported by HSH.com through mid-July 2016.

Lenders offer homebuyers who want 3/1 ARMs an initial interest rate for three years. After 36 months have passed, the homebuyer’s initial rate becomes a fully indexed interest rate that’s equal to an index rate (which changes) plus a margin (a fixed percentage).

ARMs are often tied to mortgage index rates such as the London Interbank Offered Rate (LIBOR), which is the most common benchmark that banks around the globe use to set short-term interest rates.

How 3/1 ARM Rates Stack Up Against Other Mortgage Rates

The initial mortgage rates associated with 3/1 ARMs are usually lower than those offered for fixed-rate mortgages. But after the 36-month introductory period comes to an end, homeowners with 3/1 ARMs can get stuck with interest rates that are as much as 6% higher than their initial rates.

If you have a fixed-rate mortgage, such as a 30-year fixed-rate home loan, your interest rate and mortgage payment will always remain the same. But if you have a hybrid mortgage loan like a 3/1 ARM, your mortgage payments could drastically change every year once the three-year introductory period is over.

In most cases, folks with 3/1 ARMs have 30-year loan terms. That means that for 27 years, these homeowners have to deal with fluctuating interest rates that could make their mortgage payments expensive if rates climb.

3/1 ARM Rate Caps

Interest rate caps save many homeowners with 3/1 ARMs from having to deal with sky high rates. These caps limit how much interest rates can increase once interest rates adjust. There are interest rate caps that limit how high interest rates can climb each year as well as ones that prevent interest rates from rising too much over the course of the entire loan term.

Even with an interest rate cap in place, managing your money and sticking to a budget can be difficult when you’re not sure how much your mortgage will cost you. That’s the biggest drawback of having an adjustable-rate mortgage.

3/1 Adjustable-Rate Mortgage Quotes

Before you apply for an adjustable-rate mortgage, it’s best to compare 3/1 ARM mortgage rates. That way you can make sure you’re getting the best deal on your mortgage.

You can easily find free 3/1 ARM mortgage rate quotes online. Each rate quote will give you an idea of what the mortgage payments for your 3/1 ARM might cost, based on factors like your credit score, your down payment and the price you’re willing to pay for the home you’re buying.

It’s a good idea to look for mortgage rates have low APRs and zero prepayment penalties for people who want to pay off their mortgage loans early. The APR (or the annual percentage rate) not only considers how much interest borrowers owe within a year, but it also considers the fees and other charges that they’re responsible for covering. Not having a prepayment penalty allows you to pay off your mortgage early if you are ever able.

How to Get the Lowest 3/1 ARM Rates

3-1-ARM
Photo Credit: ©iStock.com/vgajic

The lowest 3/1 ARM mortgage rates are typically reserved for the folks with the best financial track records. In other words, these folks have income stability, plenty of cash savings and high credit scores. And they don’t have a ton of debt.

The minimum credit score and the maximum debt-to-income ratio that you’re required to have will vary depending on your mortgage lender. But if your FICO credit score is below 620, you might not be able to qualify for a conventional loan. That means that you might only be able to get a mortgage that’s backed by the FHA or the USDA.

When it comes to buying a home, cash is king to keep your monthly payments lower. If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance. Plus, you might not get the best interest rate since you’ll need a bigger mortgage and the lender will have more to lose if you default.

On the other hand, if you have a lot of cash on-hand, you can make a big down payment and buy mortgage points. Both of these actions can reduce your mortgage rate.

Bottom line: If you’re planning to buy a house in the future and you want to save on interest, it’s a good idea to put effort into boosting your credit score, increasing your savings and paying down debt.

Taxes and 3/1 ARMs

The mortgage interest deduction is just one tax break that homeowners can qualify for. Some states let homeowners claim a double deduction, meaning that they can claim the mortgage interest deduction when they file both their state and federal income tax returns. Generally, if you want to take advantage of the tax write-off, you’ll have to itemize your deductions.

If you claim the mortgage interest deduction with a 3/1 ARM, don’t be surprised if your tax savings are relatively low, at least for the first three years of your loan term. Because you’ll have a lower interest rate than your neighbors with fixed-rate mortgages, you won’t be paying very much interest in the beginning.

If you’re buying a house, keep in mind that you might have to pay a real estate title transfer tax in addition to property taxes. If you decide to sell your home later on, doing so could increase your tax bill.

Refinancing Your 3/1 ARM

If you’re afraid that you’ll get stuck with a high interest rate beginning with the 37th month of your loan term, you can always try to refinance. That means that you’ll have to pay for closing costs and go through the process of convincing your existing mortgage lender (or another lender) that you deserve a loan with a lower mortgage rate. But if rates are falling, refinancing might be worth it to save you money in the long term.

Some homeowners with fixed-rate mortgages decide to refinance and take on 3/1 ARMs. That might be a good move if you want a lower interest rate and you plan on moving within several years. But if you’re refinancing and you want to stay in your house for the remainder of your loan term, getting a 3/1 ARM might not make sense. It’s important to run the numbers to see both the costs and the potential savings of either option.

If you’re not sure whether you can pay for extra interest when the mortgage rate adjusts after three years, you might be better off refinancing and getting another fixed-rate home loan.

Big Cities with the Healthiest Housing Markets

With SmartAsset’s interactive Healthy Housing Markets map, you can locate the healthiest housing markets among America's largest cities. Search for the overall healthiest markets or look specifically at one of our four healthy-housing indicators: stability, risk, ease of sale and affordability. Hover over a city or state to get more information.

Rank City Average Years Living in Home Avg. Homes with Negative Equity Homes Decreasing in Value Avg. Days on Market Home Costs as % of Income

Methodology A healthy housing market is both stable and affordable; homeowners in a healthy market should be able to easily sell their homes, with a low risk of losing money over the long run. So, in order to find the big cities* with the healthiest housing markets in the country, we considered the following four factors: stability, affordability, fluidity and risk of loss.

We measured stability with two equally weighted indicators: the number of years people remain in their homes and the percentage of homeowners with negative equity (as homeowners with negative equity are more likely to go into foreclosure). To account for our second factor, risk, we used the percentage of homes that decreased in value. To determine housing market fluidity, we looked at data on the average time a for-sale home in each area spends on the market - the longer it takes to sell, the less fluid the market. Finally, we calculated affordability as the monthly cost of owning a home as a percentage of household income in each county and city.

Affordability accounted for 40% of the housing health index, while each of the other three factors accounted for 20%. When data on the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets.

Sources: US Census Bureau 2015 American Community Survey, Zillow
*For this study we looked at the 100 biggest U.S. cities by population with available data