Frequently Asked Questions
What is an ARM?
An adjustable-rate mortgage. The rate is fixed for an initial period, then adjusts periodically based on an index plus a margin, subject to caps.
What do the numbers in a 5/6 ARM mean?
The first number is the initial fixed period in years. The second indicates how often it adjusts thereafter — a 5/6 ARM is fixed for five years then adjusts every six months.
Why are ARM rates lower initially?
The lender is taking less long-term rate risk because the loan reprices. That reduced risk is passed to you as a lower initial rate.
What is the index and margin?
The index is a published benchmark rate that moves with the market. The margin is a fixed amount the lender adds. At adjustment, your new rate is index plus margin, subject to caps.
What are rate caps?
Limits on how much the rate can change. Typically expressed as three numbers: the initial adjustment cap, the periodic cap, and the lifetime cap. These define your worst case.
How do I know my worst-case payment?
Apply the lifetime cap to your starting rate and calculate the payment at that level. If you could not carry that payment, the ARM is riskier than it looks.
Should I use an ARM on a long-term hold?
Generally fixed is safer for a genuine long-term hold, since you avoid reset risk entirely. The certainty is usually worth the premium over a decade or more.
Should I use an ARM if I plan to sell in five years?
An ARM with a five-year fixed period may fit well, since you would exit before the first adjustment. Confirm your timeline is realistic before relying on it.
Does an ARM affect my coverage ratio?
The qualifying calculation uses the initial payment. Some lenders qualify at a stressed rate rather than the start rate — ask which applies, as it changes the ratio.
What happens at the first adjustment?
The rate resets to index plus margin, subject to the initial cap. If rates have risen substantially, the payment increase can be significant.
Can I refinance before the ARM adjusts?
Usually that is the plan for investors choosing ARMs. It assumes financing will be available on acceptable terms at that time, which is not guaranteed.
Do ARMs have prepayment penalties?
Often yes, structured similarly to fixed-rate DSCR loans. Check whether the penalty period aligns with your intended exit.
How much cheaper is an ARM initially?
It varies with market conditions and the yield curve. Sometimes the spread is meaningful; sometimes it is minimal, in which case the fixed rate is clearly better.
Is there a scenario where fixed prices better than an ARM?
In certain rate environments the spread narrows to almost nothing, and occasionally inverts. When that happens, taking the fixed rate is straightforwardly better.
Does an ARM work with an interest-only period?
Some programs combine both. This produces the lowest initial payment but concentrates two forms of reset risk — rate adjustment and principal amortization — at the end of the period.
How do I model ARM risk properly?
Calculate the payment at your start rate, at the first adjustment cap, and at the lifetime cap. Then check the coverage ratio at each. If the property fails at the lifetime cap, understand the exposure you are accepting.
Are ARMs common on DSCR loans?
Both structures are widely available. Thirty-year fixed is popular for its simplicity, while ARMs appeal to investors with defined shorter hold periods.
Does my hold plan really determine the choice?
Largely, yes. If you will hold beyond the fixed period, you are taking rate risk. If you will exit before it, you are capturing a discount for risk you never bear.
What if my plans change and I hold past the reset?
You carry the adjusted payment or refinance at whatever terms exist then. This is precisely the risk, and it is why honest hold planning matters more than the rate difference.
Which should I choose?
If your hold is genuinely long-term or uncertain, fixed. If you have a defined exit inside the fixed period and the spread is meaningful, an ARM can be reasonable. Model the worst case either way.
