A 15/15 adjustable-rate mortgage (ARM) explained
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer a 15/15 adjustable-rate mortgage (ARM). Any information described in this article may vary by lender.
Quick insights
- A 15/15 adjustable-rate mortgage is a type of mortgage loan that offers borrowers a fixed rate for 15 years, followed by a rate that adjusts only once for the remainder of the loan term.
- The advantages of a 15/15 ARM loan include benefiting from lower initial interest rates and achieving long-term stability with added flexibility compared to other mortgage types.
- Cons of taking out a 15/15 ARM loan include the potential for a significant payment spike after 15 years and a more complex structure compared to fixed-rate loans.
When you’re exploring mortgage options with your bank or credit union, finding the right fit for your financial goals and long-term plans is key. A 15/15 adjustable-rate mortgage (ARM) offers a unique structure that combines the stability of a long fixed-rate period with the flexibility of a rate adjustment down the line.
In this article, we’ll break down how a 15/15 ARM works, what sets it apart from other mortgage types and the potential benefits and drawbacks to consider for your homebuying journey.
How does a 15/15 ARM work?
A 15/15 ARM is a type of hybrid adjustable-rate mortgage loan where a homebuyer pays a fixed rate for 15 years, followed by a rate that’s adjusted once. You would then pay that new rate for the remaining 15 years of the loan’s 30-year lifespan. The adjusted rate is based on fluctuating market conditions.
How do you qualify for an ARM loan?
Although requirements can vary by lender, here’s a general idea of what you’ll need to qualify for a 15/15 ARM loan:
- Good credit score: Most lenders look for a minimum credit score of 620 to approve an ARM loan. If your score is below that threshold, it may be difficult to qualify.
- Low debt-to-income (DTI) ratio: Lenders typically want your DTI ratio (your total monthly debt payments divided by your gross monthly income) to be below 50%. A lower ratio improves your chances of approval and may also help you qualify for better terms.
- 3-5% down payment: For a conventional ARM, you can expect to put down at least 3–5%. If your down payment is less than 20% on a conventional mortgage, you’ll likely need to pay private mortgage insurance (PMI). If you’re considering a Federal Housing Administration (FHA) ARM loan, the minimum down payment is 3.5%, but this comes with the added cost of mortgage insurance premiums that last for the life of the loan.
Is a hybrid loan better than interest-only or payment-option ARMs?
In general, hybrid ARMs are more predictable than interest-only or payment-option ARMs. Hybrid ARMs provide a fixed, lower interest rate for an initial period, giving you predictable, stable payments before the rate adjusts. This can be beneficial if you plan to sell or refinance before the adjustment period, allowing you to take advantage of lower rates without long-term risk.
On the other hand, interest-only ARMs offer low initial payments and allow borrowers to pay only the interest for a set period, but you don’t build equity during the interest-only period. When the interest-only phase ends, you’ll begin paying both principal and interest.
Finally, payment-option loans offer flexible monthly payment choices, such as interest-only, minimum payments (which may not cover all interest) or full principal and interest. However, such an arrangement can lead to negative amortization if the minimum payment doesn’t cover accruing interest.
What influences ARM rates?
Like with any mortgage, adjusted-rate mortgages are influenced by two key components: the index and the margin. The index is a market-driven interest rate—such as the Secured Overnight Financing Rate (SOFR) or U.S. Treasury yields—that can fluctuate over time due to economic factors like inflation or monetary policy decisions by the Federal Reserve. In other words, your rate adjusts at a set period based on how the index changes. For a 15/15 adjustable-rate mortgage, your rate adjusts at the 15-year mark.
By contrast, the margin is a fixed percentage set by your lender and is determined by factors like your credit score, loan type and down payment. Your ARM rate is calculated by adding the current index to your loan’s margin. Other elements that can affect your payments over time include rate caps (which limit how much your rate can increase) and your loan’s specific terms.
How do interest rate caps work for ARM loans?
Interest rate caps on ARMs are safeguards set by lenders that limit how much your interest rate can increase or decrease during adjustment periods and over the life of the loan. There are three types of interest rate caps:
- Initial adjustment cap: Initial caps limit how much your rate can increase the first time your rate adjusts. This cap is often set at 2% or 5%, which means when your rate adjusts for the first time, it can't increase or decrease by more than two or five percentage points from the original fixed rate.
- Subsequent adjustment cap: Subsequent (or periodic) caps limit how much your rate can increase during each adjustment period. Usually, this cap is set at 1% or 2%, which limits how much your rate can rise or fall at each adjustment. In other words, it can’t vary more than one or two percentage points from the previous rate.
- Lifetime adjustment cap: Lifetime caps limit how much your rate can increase or decrease over the life of your loan. Typically, this cap is set at 5%, meaning your interest rate can never increase or decrease by more than five percentage points from the original rate. However, some loans may allow for a higher cap. It’s also worth noting that certain loans have separate limits on how much the rate can decrease over time (known as a “floor”), which may differ from the cap on increases.
When is it ideal to take out a 15/15 ARM loan?
Compared to other types of mortgages, 15/15 ARMs can benefit homebuyers in several scenarios.
When you plan on moving within 15 years
A 15/15 ARM can be a financial move if homebuyers want to capitalize on lower fixed initial rates and then sell or refinance their home before the adjusted rate takes effect at the 15-year mark. This can be beneficial for people who are searching for starter homes or those who have jobs that require frequent moves, like military personnel and investors.
Whatever your situation is, a 15/15 ARM can reduce interest costs during short-term ownership.
When you want long-term stability with some flexibility
Unlike other ARMs that adjust every year or six months after the initial fixed-rate period, such as the 5/1 or 7/1, the 15/15 ARM only adjusts once. In this case, you can get 15 years of payment stability at (usually) a lower rate than a fixed mortgage. After the adjustment, the new rate is fixed for the remaining 15 years of the life of the loan, so you wouldn’t have to brace yourself for any further potential payment spikes.
When you plan to make extra payments or pay off early
A 15/15 ARM could be ideal if you intend to pay down your mortgage aggressively. The lower initial rate frees up cash flow, allowing you to pay off principal faster and build equity more quickly. However, you may want to ensure there is no prepayment penalty for paying off or refinancing before the rate adjusts.
If you expect your income to increase
Borrowers who are early in their careers or expecting higher future earnings may find a 15/15 ARM attractive. That’s because they’ll be able to comfortably manage potential rate increases once the adjustment period hits. At first, homebuyers can benefit from lower initial payments, and should the rate increase substantially, they could be more equipped to handle a higher payment if it occurs.
When you want to maximize buying power
The lower initial rate and payment plan of a 15/15 ARM can enable buyers to qualify for a larger loan or afford a home with additional features compared to fixed-rate alternatives. This type of home loan can be particularly useful when the housing market cost is high, or when borrowers are taking out jumbo loans. With jumbo loans, 15/15 ARMs can be advantageous because the interest savings may be more pronounced with larger balances.
What are the risks of taking out a 15/15 ARM loan?
While a 15/15 ARM offers a long fixed-rate period and only one rate adjustment, it still carries several potential risks and drawbacks that are important to consider.
Potential for payment increase
A potential risk is that your interest rate may increase after the initial 15-year fixed period if market rates rise. Even though there’s a cap on how much the rate can increase, the new payment could still be much higher than what you’re used to, straining your budget. If you end up keeping the loan beyond the first adjustment and rates rise, you could pay more in interest over the life of the home loan than you would with a fixed-rate mortgage.
Refinancing risks
Many borrowers plan to sell or refinance before the adjustment. However, there’s no guarantee you’ll be able to refinance if rates are high, your home value drops or your financial situation changes. If you can’t refinance and rates have increased, you could be stuck with a much higher payment once the adjustment period begins.
Complexity
ARMs in general have more complicated terms and structures than fixed-rate loans. Understanding caps, margins and adjustment mechanisms is essential. So borrowers who don’t fully grasp these details may face unexpected costs or payment changes that can feel financially overwhelming.
15/15 adjustable-rate mortgage (ARM) FAQ
What does 15/15 ARM mean?
A 15/15 ARM is a type of hybrid adjustable-rate mortgage loan where the interest rate stays fixed for the first 15 years and then adjusts only once after that initial period. The new rate remains in place for the remaining 15 years of the 30-year loan term.
Is it a good idea to get an ARM loan?
An ARM loan can be wise if you plan to move or refinance before the fixed-rate period ends, want lower initial payments or expect your income to increase over time. It’s especially useful in high-cost markets where qualifying for a larger home loan matters. However, if you plan to stay in your home long-term, prefer predictable payments or are concerned about rising interest rates, a fixed-rate mortgage may be a better fit.
Choosing between the two depends on your financial goals, timeline and risk tolerance.
In summary
A 15/15 ARM can offer the best of both worlds: an extended period of rate stability followed by a single adjustment that reflects where the market stands at that time. For some homebuyers, especially those planning to move or refinance within 15 years, it may be a smart and cost-effective option. As with any mortgage, it’s important to weigh the pros and cons, consider your financial goals and speak with a home lending advisor to find the loan that fits your needs.
