What Is an Adjustable-Rate Mortgage and Should I Consider One in San Diego?

What Is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage starts with a fixed interest rate for an initial period — typically 5, 7, or 10 years — and then adjusts annually based on a market index. The initial rate on an ARM is usually lower than the comparable 30-year fixed rate, making monthly payments more affordable in the early years.

How ARM Adjustments Work

• The initial fixed period: 5/1, 7/1, or 10/1 ARM means fixed for 5, 7, or 10 years then adjusts annually
• The index: Most ARMs are tied to the Secured Overnight Financing Rate (SOFR) or similar benchmark
• The margin: A fixed percentage added to the index to determine your new rate at each adjustment
• Caps: Most ARMs limit rate increases per adjustment (typically 2 percent) and over the loan's life (typically 5 to 6 percent above initial rate)

When ARMs Make Sense in San Diego

• You plan to sell or refinance within the initial fixed period
• You expect interest rates to fall significantly before the adjustment period begins
• You need the lower initial payment to qualify for a higher purchase price
• Your income is expected to increase significantly before the first adjustment

The Risk of ARMs

If rates rise significantly before you sell or refinance, your payment could increase substantially at the first adjustment. A 5/1 ARM at 6.0 percent on a $700,000 loan produces a $4,199 monthly payment. If it adjusts to 8.0 percent, the payment jumps to approximately $5,139 — an additional $940 per month. Buyers who plan to stay long-term should carefully evaluate this risk.

ARMs in San Diego's Current Market

ARMs gained popularity when fixed rates were elevated, offering buyers payment relief during the initial period. With the expectation of rate decreases over time, some San Diego buyers use ARMs with the intention of refinancing to a fixed rate before the first adjustment. Discuss this strategy with your lender and financial advisor before proceeding.

Related Reading on RiederHomes.com:

→ Blog #7: Understanding Interest Rates

→ Blog #8: Rate Lock Strategy

→ Blog #3: Types of Home Loans

→ Blog #14: 15 vs. 30 Year Mortgage

— Mance Rieder, Broker Associate | Rieder Homes Group | REAL Broker | riederhomes.com | 858-295-0556