What Is a 3-Year Adjustable Rate Mortgage (ARM)?

Written by Chloe GoodshoreFebruary 9th, 20234 minute read

Compare ARM terms | Fixed-rate mortgage | What's the 3-year ARM rate? | Types of 3-year ARMs | Benefits | Drawbacks | FAQs

A 3-year adjustable rate mortgage (ARM) is a hybrid mortgage that gives you a fixed interest rate for three years and an adjustable rate after that.

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How does a 3-year ARM work?

A 3-year ARM has a fixed "teaser" interest rate for the first three years of the loan. After that, the interest rate adjusts on a recurring schedule, typically every six months. On a 30-year mortgage, the adjustable period lasts for 27 years ― the rest of the loan term.

Lenders no longer offer 3/1 ARMs (which adjust annually after the teaser period). Instead, 3/6 ARMs (which adjust every six months) have become the norm.

However, some borrowers who had 3/1 ARMs in the past may still be paying them off.

Buyers like 3-year ARMs because the initial fixed rate is often lower than rates for other kinds of mortgages. But once the adjustable rate kicks in, you can expect higher monthly payments (though within certain limits).

Because rates and monthly payments will increase after the fixed-rate period, 3-year ARMs are best for homeowners who plan to either sell or refinance their home within the first three years.

3-year ARM vs. other ARMs

Generally speaking, a shorter fixed-rate period will get you a lower starting interest rate. A 3/6 ARM, for instance, will usually have a lower initial interest rate than a 7/1 ARM, and a 7/1 ARM will have a lower rate than a 10/1 ARM.

30-year ARM types
Fixed-rate period
Variable rate period
5 years
25 years
7 years
23 years
10/1 ARM
10 years
20 years

3-year ARM vs. fixed-rate mortgage

With a fixed-rate mortgage, you'll have consistent, predictable monthly payments throughout the life of your loan.

With a 3-year ARM, you'll enjoy low monthly payments for the first three years, but then you'll have unpredictable — likely, higher — bills every 6–12 months.

You may prefer the 3-year ARM if you want to take advantage of lower initial interest rates and save money at the start of your loan term.

» JUMP: Is a 3-year ARM right for you?

What’s the 3-year ARM rate?

You can compare 3-year ARM estimates on Zillow and other websites. However, those are just estimates.

Your specific interest rate will depend on several different factors, from your lender to your credit score to your down payment.

Your loan contract will include details about your interest rate:

  • Teaser interest rate
  • Length of fixed-rate period
  • Loan reset date
  • Rate adjustment
  • cadence Interest rate cap

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Types of 3-year ARMs

A jumbo loan is a home loan that’s larger than the normal lending limits of Fannie Mae, Freddie Mac, the FHA, or the VA. You can get adjustable-rate jumbo loans ― including 3-year ARMs.

An interest-only 3-year ARM lets you pay only interest during your three-year teaser period. You won’t have to pay principal until year four, when your rate begins adjusting.

Interest-only loans can give you even lower starting monthly payments than typical ARMs. But your monthly payments will go up once principal payments and rate adjustments kick in.

The Federal Housing Administration offers 3-year ARMs with clear limits on the maximum interest increases:

  • 1 percentage point increase annually (after the fixed-rate period)
  • 5 percentage point increase over your loan term

As an added bonus, FHA 3-year ARMs have low down payment requirements ― just 3.5%.

Why should you use a 3-year ARM?

3-year ARMs work best when you want to start out with a low mortgage payment and you expect one of the following changes:

🚗 You’ll move within 3 years

If you plan to move and sell your home before your adjustable rate kicks in, a 3-year ARM can save you money with low monthly payments. And since you’ll pay off your current mortgage when you sell, you won’t have to worry about higher rates and payment amounts.

💸 You plan to refinance

Refinancing gives you a chance to take advantage of low monthly payments now and predictable payments later (after you refinance).

Especially if you expect interest rates to drop in the next three years, you may want to refinance with a conventional fixed-rate loan.

💰 You anticipate more income

If you expect a promotion or higher-paying job, you may not mind the higher monthly payments that come after your fixed-rate period ends. A one-time windfall, like an inheritance, can also let you pay off your mortgage before the higher monthly payments start.

Borrow carefully
Markets, jobs, and other circumstances can all change. So even if you expect to move, refinance, or get more income, you can’t count on those. Only borrow with a 3-year ARM if you know you can handle the higher monthly payments when your rate resets.

3-year ARM disadvantages

All adjustable-rate mortgages have one big disadvantage: you’ll have a hard time predicting and planning for your monthly mortgage payment after your teaser rate ends.

A 3-year ARM might not be a good choice if you anticipate:

  • Your other household expenses to go up
  • Your income to decrease
  • Interest rates to go up across the board


A 3/1 ARM means you have a fixed interest rate for three years, and your interest rate adjusts each year after that.

A 3-year ARM gives you a fixed interest rate for the first three years of your loan. After that, your rate adjusts regularly for the remaining 27 years of your mortgage.

3-year ARM interest rates are based on the SOFR (Secured Overnight Financing Rate), so they change every day.

An adjustable-rate mortgage starts off with a fixed interest rate for a certain period of time. A 5/1 ARM, for example, has a fixed rate for five years, while a 3/6 ARM has a fixed rate for three. After that fixed-rate period, your lender will adjust your interest rate on a scheduled basis for the remainder of your 30-year loan term.