Buying a new home is exciting — but understanding your mortgage options can feel overwhelming, especially when rates fluctuate. One term you may have come across is ARM mortgage, short for adjustable-rate mortgage.

With the return of competitive loan options and promotions like New Home Inc’s 3.99% 7-Year ARM, more buyers are asking: “What exactly is an ARM, and is it the right fit for me?”

Let’s explore how an ARM works, its pros and cons, and when it might make sense for your home-buying journey.

Adjustable-Rate Mortgage (ARM) Basics

An adjustable-rate mortgage is a home loan with an interest rate that changes over time.

During the initial fixed period, your rate stays the same — typically for 3, 5, 7, or 10 years. After that, it adjusts periodically (usually every six months or annually) based on a financial benchmark like the Secured Overnight Financing Rate (SOFR).

For example:

• If you choose a 7/1 ARM, your rate is fixed for 7 years, then adjusts annually for the remainder of the loan.

Each adjustment adds your lender’s margin to the benchmark rate to determine your new interest rate. The margin is based on your creditworthiness and remains constant throughout the loan.

Importantly, ARMs have rate caps — limits on how much your interest rate (and payment) can increase per adjustment period and over the life of the loan. These caps protect borrowers from excessive increases.

ARM vs. Fixed-Rate Mortgage

When taking out a mortgage, you’ll typically choose between a fixed-rate or an adjustable-rate loan.

• Fixed-rate mortgages have one interest rate for the entire loan term, giving you predictable monthly payments.

• Adjustable-rate mortgages (ARMs) start with a lower fixed rate, then adjust later based on the market.

In most cases, ARMs offer a lower initial interest rate than fixed-rate loans. That lower starting point means smaller monthly payments — at least for the first few years.

This flexibility makes ARMs appealing for buyers who plan to move or refinance before the adjustment period begins. However, if you plan to stay long-term, a fixed-rate loan may provide greater peace of mind.

Types of Adjustable-Rate Mortgages

There are a few common ARM structures, each offering different levels of flexibility and predictability:

Hybrid ARMs

These begin with a fixed-rate period (typically 5, 7, or 10 years) followed by variable adjustments.

• Example: A 7/1 ARM stays fixed for seven years, then adjusts annually.

• The shorter the fixed period, the lower your starting rate tends to be.

This is the type of ARM utilized by New Home Inc and its preferred lender, TowneBank Mortgage, offering buyers extra stability and security during the initial fixed period while still providing long-term flexibility once the adjustment phase begins.

Interest-Only (I-O) ARMs

These allow you to pay only the interest for a set period (often 3–10 years), lowering your initial payments. Once the interest-only period ends, you begin paying both principal and interest.

However, interest-only ARMs are much less common today, as most lenders and buyers prefer hybrid options with more predictable payment structures. They can be beneficial in niche situations but require careful financial planning.

Payment-Option ARMs

These give borrowers multiple payment options each month — such as paying interest only or making a minimum payment. However, choosing minimum payments can result in negative amortization, meaning your loan balance grows over time.

Payment-option ARMs are also far less common in today’s lending environment, used primarily for specific financial circumstances or short-term ownership strategies.

How ARM Rates Are Determined

Once your fixed period ends, your rate is adjusted based on a benchmark index plus your margin.

Example:

• If the benchmark rate is 3.5% and your margin is 2.25%, your new rate becomes 5.75%.

• If the benchmark drops to 2.75%, your rate decreases to 5%.

The index changes with the economy, but your margin does not. That’s why understanding both is key before committing to an ARM.

To learn more about how these benchmarks work, visit the Consumer Financial Protection Bureau’s guide on adjustable-rate mortgages.

When an ARM Mortgage Can Be Beneficial

ARMs can be a smart financial move under the right circumstances. Here are common scenarios when an ARM makes sense:

1. You Don’t Plan to Stay Long-Term

If you expect to move within a few years — whether relocating for work or upsizing later — an ARM’s lower introductory rate can help you save on interest while you own the home.

2. You Plan to Pay Off Your Mortgage Early

If you anticipate paying off your loan quickly due to bonuses, inheritance, or other income, an ARM can reduce your interest costs before it resets.

3. Lower Initial Payments Are a Priority

ARMs generally start with smaller monthly payments than fixed-rate loans. This flexibility can help you manage your budget more effectively, build savings, or invest in other priorities during your first years of homeownership.

4. You Want to Take Advantage of Special Offers

Promotions like New Home Inc’s 3.99% 7-Year ARM can make homeownership more accessible by locking in a below-market rate during your initial fixed period.

When an ARM Might Not Be the Best Fit

While ARMs offer flexibility, they’re not ideal for every buyer.

If you prefer consistent, predictable monthly payments or plan to live in your home long-term, a fixed-rate mortgage might be better.

Additionally, if you’re concerned about future rate increases or find budgeting easier with stable payments, a fixed-rate loan provides more peace of mind.

You can always explore both options with your lender before deciding.

Is an ARM Mortgage Right for You in 2025?

In today’s housing market, ARMs are gaining renewed popularity thanks to promotions like New Home Inc’s 3.99% 7-Year ARM.

With inflation easing and mortgage flexibility improving, this loan type can offer meaningful savings — especially if you plan to move or refinance within the first seven years.

Every buyer’s situation is unique, and the best choice depends on your long-term plans, budget, and comfort level with potential rate changes.

New Home Inc’s preferred lenders, including TowneBank Mortgage, can help you evaluate your financing options and determine whether a 7-Year ARM or fixed-rate mortgage aligns with your goals.

Explore our available homes and see how you can take advantage of this limited-time 3.99% ARM promotion today!

Frequently Asked Questions About ARM Mortgages (2025)

What does “7/1 ARM” mean?

A 7/1 ARM has a fixed rate for the first 7 years and then adjusts annually for the rest of the loan term based on market conditions.

Do ARM mortgage rates always increase?

Not necessarily. ARM rates can go up or down depending on changes in the benchmark index (like SOFR). Some borrowers even benefit from rate decreases during economic slowdowns.

Is an ARM better than a fixed-rate mortgage?

It depends on your financial goals. If you plan to stay in your home for a shorter period or expect to refinance, an ARM can save money upfront. For long-term stability, a fixed-rate loan might be better.

Can I refinance an ARM before it adjusts?

Yes! Many homeowners refinance before the adjustment period begins to lock in a fixed rate or take advantage of new promotions.

For a deeper dive, visit Freddie Mac’s adjustable-rate mortgage resource page. or listen to our Podcast!