You expect to move
If you plan to sell before the fixed period ends, the later adjustments may never reach you. Plans change, so weigh what happens if you stay longer.
Adjustable rate loans
An adjustable rate mortgage, explained in plain English.
An adjustable rate mortgage starts with a rate that is fixed for a set number of years. After that, the rate can change at set times, within limits called caps. Here is how it works, when the rate can change, and who it suits.
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The basics
How an adjustable rate works
The fixed period. The loan starts with a rate that does not change for a set number of years, often five, seven or ten. Your principal and interest payment stays the same during that time.
The adjustment period. After the fixed period, the rate is reset at set times based on a published market index plus a set amount called the margin, both named in your loan documents. On most conventional adjustable loans the rate can change every six months; some other programs change it once a year.
The payment can rise or fall. When the rate changes, your payment changes with it. Before you choose an adjustable rate, ask for the highest payment the caps allow and make sure it fits your budget.
The caps that limit changes
- First change cap: limits how much the rate can move at the first adjustment
- Later change cap: limits how much it can move at each adjustment after that
- Lifetime cap: limits how far the rate can ever rise above the starting rate
The caps, index and margin for your loan are in the disclosures you receive with your loan estimate.
Is it for you?
When an adjustable rate can make sense
An adjustable rate is a trade-off: a set period of certainty, then a rate that can change. It tends to suit people with a clear plan for the years ahead.
You can handle a higher payment
If your budget could absorb the highest payment the caps allow, the risk of a rise is easier to carry.
Jumbo and portfolio loans
Some jumbo programs, and loans a lender keeps on its own books, are offered mainly or only with an adjustable rate.
Jumbo loansCompare before you choose. A loan officer can quote an adjustable and a fixed rate on the same loan, so you can see the difference in the starting rate and weigh it against the chance of a higher payment later. See how fixed rate loans work.
Compare
Adjustable rate or fixed rate
| Question | Adjustable rate | Fixed rate |
|---|---|---|
| The interest rate | Fixed for a set number of years, then can go up or down at set times, within the caps | Set at closing and never changes |
| Principal and interest payment | The same during the fixed period, then can rise or fall with the rate | The same every month |
| Often chosen by | People who expect to sell or refinance before or soon after the fixed period ends | People who plan to keep the home and the loan for a long time |
| Things to weigh | The payment can rise after the fixed period; refinancing later is never certain | If rates fall later, the only way to a lower rate is to refinance, which has closing costs |
Questions
Common questions about adjustable rate loans
What happens when the fixed period ends?
The rate is reset from the index named in your loan documents plus the margin, within the caps. Your servicer tells you the new rate and payment before the change takes effect.
Can the rate go down as well as up?
Yes. It follows the index, within the caps. Some loans also set a lowest rate, called a floor; it is shown in your disclosures.
Can I refinance into a fixed rate later?
You can apply to refinance at any time, but a new loan depends on your credit, income and home value at that time, and it has closing costs. Do not count on refinancing as your only plan. See refinancing your mortgage.
Which programs offer an adjustable rate?
Conventional loans can be fixed or adjustable, and many jumbo programs offer adjustable rates. Ask a loan officer which options fit your home and your plans.
Do you lend in my state?
Fidelity Residential is licensed in many states. The full, current list is on NMLS Consumer Access (opens in a new tab), or call us at 732-686-9999.
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Get a quote, apply online, or talk it through with a licensed loan officer.
This page is general information, not a commitment to lend. Programs, terms and eligibility depend on credit, income, property and underwriting review and are subject to change without notice.