1st Advantage Mortgage is a licensed mortgage broker and lender in Charlotte, NC. As a mortgage lender and broker, we compare ARM caps, margins, and pricing across lenders so you can understand how the terms may affect future payments.
What Is an Adjustable-Rate Mortgage?
Let’s start with the basics. Every mortgage has an interest rate. It’s what you pay your lender in exchange for borrowing funds to buy a house. An ARM is a type of mortgage where the interest rate varies throughout the lifetime of the loan.
When home buyers initially take out an ARM, the interest rate typically remains fixed for a specified amount of time – could be anywhere between one month or 10 years. The rate during this time period is typically lower than fixed-rate mortgage interest rates, hence the appeal.
Once this period has expired, the interest rate of an ARM will move based on an index set by market forces. The interest that new homeowners pay can change on a yearly or even monthly basis.
Since interest rates rise and fall based on an index, ARMs are also called “floating mortgages” or “variable-rate mortgages” – in case you hear someone throw those terms around. Before you call your lender, here are a few more terms that will help you understand the process (and make you sound like you totally know what you’re talking about).
- Index: This economic indicator is used to calculate an ARM's interest rate. It's the benchmark used to determine whether premiums will increase or decrease at a given time.
- Initial & Periodic Caps: The initial adjustment cap lets everyone know how much the interest can rise or fall the first time it adjusts, which happens after the fixed-rate period ends. This ensures that the interest rate doesn't skyrocket to a crazy number. Homeowners also benefit from the periodic cap which determines how much the interest rate can change during a single interval.
- Lifetime Cap: If you want to do the math to calculate if an ARM makes more financial sense, you can use the lifetime cap in your estimations. The lifetime cap places a maximum limit on how much the rate can increase over the life of the loan, which directly correlates to how much interest you'll have to pay.
The terms of an adjustable-rate mortgage are typically expressed with two numbers. The first number represents the length of the fixed-rate. And the second number? It represents the length of the adjusted rate. So, for instance, a “2/5 ARM” equates to a fixed rate for two years followed by a floating fate for the following 5 years.
It’s common for ARMs to also have a cap structure expressed with numbers. An example of a cap structure might be written out as “2/3/5.” To the borrower, the first number means that the interest rate can increase by a maximum of 2% above the initial interest rate in the first year. In the years following, rates can increase a maximum of 3%, as indicated by the second number. The final number indicates the max interest rate over the lifetime of the loan, so here, the loan can never increase more than 5%. Starting to make sense, isn’t it?
Adjustable-Rate Mortgage Requirements
Okay, so you’re thinking that ARMs sound pretty great. Now the question is, what are the requirements for me to qualify for an ARM? Home buyers interested in getting an ARM mortgage in North Carolina, South Carolina, Texas, Florida, Virginia and Pennsylvania typically need to meet the following:
- Credit Score: Borrowers typically need a credit score of 620 or higher to qualify for an ARM. Automated underwriting may approve lower scores with strong compensating factors, and your lender will let you know if that is the case for you.
- Down Payment²: If the home you want to buy will be your primary residence, the minimum down payment is usually 5%. For two-unit properties, borrowers should anticipate 15%. For equity stakes of three or more units, 25% is standard. When refinancing to purchase a second home, ARM down payment minimums can be as low as 10%. In some instances, borrowers can put down as little as 3.5%.
- Loan Limits: In the Carolinas, maximum ARM limits on FHA, 1-unit properties run between $541,287 and $1,249,125 for a one-unit property in 2026, depending on the county.
- Debt-to-Income Ratio (DTI): The maximum DTI is usually 45% for ARMs that are manually underwritten.
If these requirements are making you nervous, let’s pause for a moment and note that these guidelines periodically change. North Carolina, South Carolina, Texas, Florida, Virginia and Pennsylvania home buyers may have financial flexibility based on their portfolios.
If you have questions about meeting the requirements, 1st Advantage Mortgage provides hands-on home loan assistance to determine if it’s the right option for you. If you don’t qualify for an ARM, there’s nothing to sweat – we’ll find the right program for you!
ARM Home Loan Eligibility
Anyone that wants to buy a house can apply for an adjustable-rate mortgage. Eligibility is determined by wide-ranging factors, and luckily, they are not necessarily income restrictions. Credit scores, income-to-debt ratios, down payments, and the amount of the home loan are all eligibility factors. It’s essential to work with a mortgage professional to determine eligibility and the best loan product for your needs.
Not sure if you’ll get approved for an adjustable-rate mortgage in North Carolina, South Carolina, Texas, Florida, Virginia and Pennsylvania? Reach out to 1st Advantage Mortgage, and we’ll connect you with a Mortgage Expert!
Not sure if you qualify? Contact us today to talk with one of our friendly Mortgage Expert.
Pros & Cons of Adjustable-Rate Mortgages
More and more people in North Carolina, South Carolina, Texas, Florida, Virginia and Pennsylvania are choosing ARMs. By that same token, the benefits may not outweigh the disadvantages from your perspective. These are common pros and cons associated with ARMs. You should carefully consider all the factors before jumping feet first into your decision.
- Lower Monthly Payments: This is a pro, and a big one too, of going with an ARM. Borrowers will be paying a much lower interest rate during the fixed-rate period than their buddies with a fixed-rate mortgage. This turns into lower monthly premiums as well.
- Short-Term Value: One strategy borrowers tend to use is taking out an ARM and later refinancing⁴ to a fixed-rate product. This allows them to take advantage of the initial cap while building credit and saving money. Home buyers often refinance only if rates increase.
- Payments Could Increase: Another ARM con? You run the risk of paying increased payments after your fixed-rate period. In some ways, an ARM has a certain element of risk-taking, because if rates uptick substantially, you could be paying more than you planned.
Work With 1st Advantage Mortgage to Secure an ARM Home Loan
If you’re feeling a little overwhelmed, take a deep breath. Let us walk you through the process. Our experienced mortgage professionals at 1st Advantage Mortgage take complicated financial jargon and break it down so everyday people can make informed decisions. We’ll work with you to discover if an ARM is really the best option for you or if a different type of loan would be more beneficial. You’ll be paired with one local team member who will be by your side from start to finish.
Apply For An Adjustable-Rate Home Loan With 1st Advantage Mortgage
If you’d like to discuss your options further or have any questions about our service, contact us to speak with one of our friendly team members.
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Adjustable-Rate Home Loan FAQs
If you have questions about securing an adjustable-rate mortgage in NC or SC, our team is here to help you. Our Mortgage Experts are happy to answer all of your questions and provide specific info to you. Here are some common questions about ARMs: