Stay with us and we’ll walk you through how ARMs work, take a look at when they might be considering instead of a regular fixed-rate mortgage, and consider average ARM rates based on Mortgage Research Center data.

You can see the previous business day’s ARM rates report here.

Average ARM mortgage rates

ARMs come in a variety of configurations in terms of how long the initial fixed period is and how frequently adjustment periods occur. For example, a 7/6 ARM is one with a fixed rate for seven years, then adjustment periods every six months.

Fortune reviewed the most recent MRC data available as of Aug. 20.

Fixed-rate vs. adjustable-rate mortgages

Fixed-rate home loans represent roughly 92% of all U.S. mortgages—a testament to their reliability. Unlike ARMs, which allow interest rate changes after an initial period, fixed-rate loans guarantee one rate for the life of the mortgage. This predictability makes them appealing to many.

Still, ARMs may offer benefits in certain situations. After all, about 8% of borrowers opt for them over the more common fixed-rate loans.

When you might consider an adjustable-rate mortgage

Three types of buyers may favor ARMs:

• Short-term homeowners: If relocation is likely within a few years, ARMs may offer savings through low introductory rates while moving before future adjustments become a concern. But, weigh carefully if you’ll actually be able to move out of your starter home as quickly as you intend. 
• Property investors: Investors may leverage ARMs for a low initial rate, then may flip the home before adjustment periods kick in or may increase rent during periods of higher interest rates if they’re renting out the property. 
• Buyers facing elevated interest levels: During high-interest periods, ARMs might offer a lower rate during the introductory time frame and even the potential for rate reductions down the line if market conditions improve.

How adjustable-rate mortgages work

ARMs generally start with low fixed interest periods lasting three to 10 years before shifting into adjustment periods. During the adjustments, your rate will be influenced by factors including:

• Benchmark indices like SOFR: Your ARM will typically be tied to a benchmark, commonly SOFR. This rate reflects the cost for banks to borrow cash overnight. The U.S. Treasury publishes a new SOFR each morning.
• Margins added by lenders: Margins are fixed percentages, which can often range between 2% and 3.5%, added by lenders to whatever benchmark is used for your ARM. The benchmark plus the margin helps determine your mortgage rate. These can vary based on things like your specific lender and your credit profile. 
• Rate caps: Adjustment caps limit how much your rate can increase during specific intervals or over the loan’s lifetime. These can include initial, subsequent, and lifetime caps.

Common ARM structures include the 5/1 ARM (five years fixed, then annual adjustments) and the 10/6 ARM (10 years fixed, then adjustments every six months). Other structures include 3/1 ARMs, 7/1 ARMs and 10/1 ARMs. 

Learn more: Why the Secured Overnight Financing Rate might matter for your mortgage.

Refinancing from an ARM to a fixed-rate mortgage

Sometimes, circumstances change. Maybe you bought a home intending to flip it, then realized it made a lot of sense to keep as your primary residence. Or maybe you bought a starter home and then realized you wouldn’t be moving as quickly as intended. In the latter case, you’re not alone. A large chunk of Millennial and Gen Z homeowners are sticking it out with their starter homes because they can’t afford to upgrade.

In such situations, it might make sense to refinance from an ARM to a fixed-rate mortgage. The process for doing this is much the same as refinancing from one fixed-rate loan to another. You’ll shop around with various lenders, submit the documents required for the application, and pay off your existing loan in full with the new one.

Pros and cons of adjustable-rate mortgages

As with any mortgage type, ARMs have benefits and drawbacks. Evaluate them carefully with a trusted loan officer to decide if this is the best type of mortgage for your situation. To get you started, a few key points are outlined below.