A 3/1 ARM is an adjustable-rate mortgage (ARM) with a fixed interest rate for three years that then adjusts each following year. You can think of a 3/1 ARM as a kind of “hybrid” home loan that combines aspects of a traditional fixed-rate mortgage and an adjustable-rate mortgage.
The main benefit of a 3/1 ARM is that you can get a lower interest rate and save on lower monthly payments for the first three years. This makes them a good idea for buyers who plan to sell their homes or refinance in the near future.
How does a 3/1 ARM work?
There are two periods in a 3/1 ARM — the fixed period and the adjustable period. The interest rate stays fixed for 3 years and then changes once every following year, hence the “3/1” description.
During the fixed period, the loan behaves like any other fixed-rate mortgage. The interest rate doesn’t change, and you make the same monthly payments.
Once the initial 3-year period ends, the lender will adjust the interest rate once per year. On a 30-year 3/1 ARM, the adjustable period lasts 27 years.
There are two components to rate adjustments after the fixed period.
- The first is the index, which the lender uses to set the base rate. This rate is usually pegged to some external market index, such as the Secured Overnight Financing Rate (SOFR)[1] or Treasury yields.
- The second is the margin, which can differ depending on the lender. The margin is essentially an extra amount the lender adds to cover loan costs and generate a profit.
You add the index and margin to calculate the new adjusted rate. For example, if the index is 5% and the index is 2%, the adjusted rate is 7%.
The good news is that lenders cap the amount that your rate can increase on any given adjustment. Relevant caps include:
- Initial cap: Limits how much your rate can change after the initial fixed interest period
- Periodic: Limits how much your rate can change with each subsequent adjustment
- Lifetime: Limits how high your rate can adjust over the loan lifetime
For example, a $300k 3/1 ARM might have an initial 5% rate that resets to 7% after the fixed period ends. The lender limits adjustments to 1% per period and places a lifetime cap of 5% over the initial rate (in this example, 10% is the lifetime cap).
3/1 ARM vs. other ARMs
Lenders offer other adjustable-rate mortgages with different fixed periods, such as 5/1, 7/1, and 10/1 ARMs.
Generally, the shorter the fixed period, the lower the initial interest rate. For example, a 3/1 ARM might offer a 5.5% initial interest rate, but a 7/1 ARM might offer a 6.5% initial interest rate instead.
Below is a quick comparison table showing the length of fixed and adjustable periods for different ARMs.
The flipside is that ARMs with a longer fixed-rate period see fewer overall adjustments. For instance, on a 3/1 ARM, your rate will adjust 27 times over the loan term. With a 10/1 ARM, the interest rate will adjust 20 times.
As such, ARMs with longer fixed periods make the most sense for long-term buyers. Compared to a 5/1 ARM, a 10/1 ARM will give you 60 more months of static payments. That’s 60 more months of predictable budgeting, even if the initial interest rate is higher.
Note: 3/1 ARMs have been the industry standard for quite some time, but many lenders now offer 3/6 ARM options. A 3/6 ARM has the same three-year fixed period, but rate increases happen every six months instead of once a year.
3/1 ARM vs. fixed-rate mortgage
The reason borrowers like 3/1 ARMs is that they can usually get a lower initial interest rate than they can with a fixed-rate mortgage. 3/1 ARM rates today[2] typically hover anywhere between three-quarters and a whole percentage point below the average rate for a fixed-rate mortgage loan.
Lenders offer the lower initial rate as a “teaser” to entice buyers who want to save on lower mortgage costs in the short term. However, once the fixed period ends, expect your monthly payments to increase.
3/1 ARMs
Pros
- Lower initial interest rates
- Save money on lower initial payments
- Good for short-term buyers or refinancers
Cons
- Future payments can fluctuate
- Payment shock when rate increases
- Risk of rate climbing
Fixed-rate mortgage
Pros
- Stability and predictability over loan term
- Avoid rising interest rates over time
- Simpler planning and budgeting
Cons
- Higher interest rates than ARMs
- Less flexibility (e.g., selling or refinancing)
You can (and should) shop around for the best deals on fixed vs. adjustable-rate mortgages.
Who should consider a 3/1 ARM?
Whether or not getting a 3/1 ARM is a good idea depends on your specific situation and finances.
The main draw of 3/1 ARMs is that you start with a lower interest rate. As such, 3/1 ARMs tend to be most useful for the following types of buyers:
Short-term buyers
A 3/1 ARM makes the most sense if you plan to sell your home before the fixed-rate period ends. You’ll save money on the lower monthly payments and avoid the increased interest costs when you sell the house and pay off the remainder of the loan.
For instance, a home flipper could buy with a 3/1 ARM, make updates, and sell to recoup the cost — all while benefiting from a lower interest rate.
Homeowners who want to refinance
Similarly, 3/1 ARMs can be a good idea if you want to refinance your home within a few years. You can reap the benefits of lower payments in the short term, then refinance to a fixed-rate mortgage before adjustments kick in.
Refinancing to a fixed-rate mortgage may be a smart move if you expect interest rates to drop within a year or two.
Individuals expecting more income
If you are expecting to make more money in the coming years, it will be easier to handle the increased payments when the fixed rate ends.
A one-time windfall, such as an inheritance, could help you pay off the loan before your monthly payments increase.
- Your income is uncertain or expected to fluctuate over the loan term.
- You plan to stay in your home for more than 5 years and don’t want to refinance.
- You have a low risk tolerance and want to avoid potential rate hikes.
Benefits and drawbacks
Like any financial product, 3/1 ARMs have benefits and drawbacks to consider. Make sure you understand the pros and cons before pulling the trigger on any loan
✅ Pros
If any or all of these are important to you, it might be worth considering a 3/1 ARM.
Lower interest rate
You’ll pay a lower interest rate and monthly payments for the first three years. This can be beneficial if you plan to sell the house before the increased interest rate kicks in.
Short-term savings
You can take the money you save from lower monthly payments and put it towards other things, like a larger down payment, buying mortgage points, or investing in a high-yield account.
Qualification flexibility
Both the VA and FHA offer 3/1 ARMs, which can be easier to qualify for than a conventional mortgage, giving buyers more options.
❌ Cons
If any of these items are a deal-breaker, consider a longer-term ARM or a fixed-rate mortgage loan instead of a 3/1 ARM.
Unpredictability
Rate changes depend on an external index that can fluctuate unexpectedly based on market conditions, making it harder to budget during the adjusted-rate period.
Payment shock
It can be difficult to adjust to higher payment obligations after transitioning from the fixed-rate period to the adjustable-rate period.
Risk of rate climbing
Your rate with an ARM can decrease, but there is also a risk that the rate will continue to increase over the loan term.
Next steps
So, is a 3/1 ARM a good idea?
A 3/1 ARM can be a wise choice for many buyers, especially those planning to sell or refinance their homes in the near future. It may also be a good idea if you expect your income to increase in the next few years. You can save money in the short term before switching to a fixed-rate loan.
However, a 3/1 ARM might not be ideal if you want to stay in your house long term or have less flexibility to make higher monthly payments. Because payments are less predictable, 3/1 ARM usually have higher qualification criteria (e.g., credit score, debt-to-income, etc.).
You could save when buying by using a Clever agent — you may also qualify for cash back at closing! Take a short quiz to start meeting agents in your area.
FAQ
A 3/1 ARM is an adjustable-rate mortgage with a fixed interest rate for the first three years that then adjusts each subsequent year.
With a 3/1 ARM loan, your interest rate and monthly payments stay the same for the first three years. After that, the lender adjusts rates and payments once a year.
According to data from Bankrate, the average interest rate for a 30-year 3/1 ARM in the US is approximately 5.48%.
The average interest rate for a 5/1 ARM mortgage in the US is approximately 5.61%. Note that these figures do not include the extended cost of the loan, such as origination or closing fees.
A 3/2/1 mortgage is a type of mortgage buydown where you initially pay a reduced rate for three years before returning to the original rate.
Lenders typically lower interest rates by 3% in the first year, 2% in the second year, and 1% in the third year. In the fourth year, the interest returns to its original higher level. This differs from a 3/1 ARM, which has a three-year fixed interest period followed by yearly rate adjustments.
Interest rates are adjusted according to a particular index plus a margin that depends on the specific lender. You can calculate rate adjustments by adding the index and margin together, subject to any adjustment caps.