Good news, they’re back.
Adjustable Rate Mortgages with favorable terms. We now have two of the most effective options for saving on a home purchase and making that refinance pencil ahead of a rate drop.
Adjustable-Rate Mortgages (ARMs) and Rate Buydowns create affordability. Best part, these aren’t competing strategies— when paired together, the savings can really add up.
Adjustable-Rate Mortgages (ARMs)
How They Work
An ARM gives you a fixed interest rate for an initial period (3, 5, 7, or 10 years), after which the rate adjusts annually. The shorter the fixed period, the lower the initial rate tends to be—but qualifying works differently depending on the term.
Qualifying Differences: 3/1 ARM vs. 7/1 ARM
- 3/1 ARM (3 years fixed, then adjusts annually):
Since the fixed period is shorter, lenders generally qualify you at a higher “fully indexed” rate (what your payment could be once the loan starts adjusting). This means your qualifying income needs to be higher or your maximum loan amount may be lower. The trade-off is the lowest starting interest rate. - 7/1 ARM (7 years fixed, then adjusts annually):
With the longer fixed period, many lenders qualify you closer to the actual note rate (the starting rate you’ll pay). This makes it easier to qualify compared to a 3/1 ARM, even though the starting interest rate itself is slightly higher.
Summary:
- 3/1 ARM = lower rate today, harder to qualify, higher risk if you stay long-term.
- 7/1 ARM = slightly higher rate today, easier to qualify, more stability for buyers planning to stay 5–10 years.
Take Away
Even though the 3/1 offers a lower introductory rate, the qualifying payment is actually higher and another combination might create a more balanced strategy depending on your timeline in the home.
Helping You Choose
Pros
- Lower starting rate compared to most fixed-rate mortgages
- Potential to save significantly during the initial fixed period
- A good fit for buyers who expect to move or refinance before the first adjustment period
Cons
- Rate may increase after the fixed term
- Less predictable than a fixed-rate mortgage if you plan to stay long-term
Who’s a Good Candidate?
- Buyers who don’t plan to stay in the home for more than 5–10 years
- Borrowers comfortable with a refinance of rates increase
- Clients wanting the lowest initial monthly payment
Example: With a 7-year ARM, your starting rate may be noticeably lower than a 30-year fixed rate, potentially saving hundreds each month, often closing the gap between the house you like and the one you love.
Rate Buydowns
How They Work
A buydown allows you (or sometimes the seller/builder) to pay upfront to temporarily or permanently reduce the interest rate.
Temporary Buydown
With a temporary buydown, your payment is calculated on a rate below the actual note rate on the loan. Common structures include a 3-2-1 buydown (rate drops 3% the first year, 2% the second, 1% the third) or a 2-1 buydown.
Pros
- Much lower payments in the first years
- Can offset those early year costs in a new home…tools, furniture, landscaping, etc.
- May be covered by seller or builder concessions, offering significant buyer savings
Funds to buydown the rate are held in escrow and can be credited toward the principal if you refinance during the buydown period. They are not a “sunk” cost.
Cons
- Temporary benefit unless you refinance or rates fall in the future
- Upfront cost if not covered by concessions
- Does not help in qualifying; borrowers must qualify on the full future note rate of the loan
Who’s a Good Candidate?
- First-time buyers easing into homeownership
- Buyers expecting income growth over the coming years
- Sellers or builders looking to make their properties more attractive
Permanent Buydown
Using a permanent buydown, your payment and qualifying are calculated at a below-market rate and do not change in the future.
While the upfront cost is higher than a temporary buydown, the payback in savings is typically inside of two years, making this ideal for those confident they plan to stay in their home who don’t like rolling the dice on rates.
Who’s a Good Candidate?
- First-time buyers easing into homeownership using seller or builder-sponsored buydowns
- Buyers looking to save on interest/payments over time
- Sellers or builders looking to make their properties more attractive
Combining ARMs and Buydowns
It’s important to remember these strategies aren’t mutually exclusive. In fact, pairing them can sometimes deliver the best overall savings. For example:
- A longer-term 7/1 ARM with a slightly higher rate, combined with a buydown, may produce lower initial payments than a 3/1 ARM on its own.
- This strategy maximizes today’s affordability while still offering future flexibility.
Can These Strategies Apply to a Refinance?
Yes! Both ARMs and buydowns can be powerful tools in a refinance situation.
- ARMs in a Refinance: If you currently have a higher fixed-rate mortgage but know you’ll only be in the home for a few more years, refinancing into an ARM can significantly lower your payment during that time.
- Buydowns in a Refinance: While less common than in purchases, buydowns can save you money if structured correctly. For homeowners anticipating income growth, business recovery, or another financial event in the near future, a temporary buydown can provide short-term relief.
- Combination Approach: If you refinance into a 7/1 ARM and layer in a buydown, you may achieve immediate payment savings and a more manageable qualification path compared to refinancing into a shorter-term ARM.
Final Thoughts
The right choice depends on your financial goals, how long you plan to stay in the home, and your comfort level with future rate adjustments.
Work with a lender open to guiding you through all options, help you compare scenarios, and providing you an accurate underwritten quote—including all loan-level price adjustments—to truly find your best option(s).
