1-Year ARM Mortgage in the US. Apply online

A 1-year ARM is a type of hybrid adjustable-rate mortgage. Like other hybrids, it has two distinct periods. During the first part of the loan term, you'll enjoy a fixed interest rate for a set number of years. With a 1-year ARM, that's one year. After that, your interest rate becomes variable and adjusts annually based on the index.

You'll typically see a lower introductory interest rate with a 1-year ARM than with a traditional fixed-rate mortgage. Since the introductory period is so short, you might even qualify for an even lower rate with a hybrid ARM. But don't get too comfortable: That low rate is only temporary, and your 1-year ARM could skyrocket in cost when it begins adjusting.

Features

Principal and Interest. The amount borrowed to buy the home is the loan's principal. The cost of borrowing that money is expressed as a percentage of the loan amount. Your monthly payment typically combines principal and interest.
Introductory Fixed Rate. A 1-year ARM starts you out with a fixed interest rate for the first year.
Monthly Mortgage Payment. Your total monthly payment includes principal and interest, as well as property taxes and homeowners insurance. If you put less than 20% down, you'll also pay mortgage insurance. Your goal is to pay off the loan while covering these expenses.
Mortgage Insurance. If you put less than 20% down, you'll need mortgage insurance on a conventional loan. This insurance protects the lender if you fail to make your mortgage payments.
Property Taxes. You'll pay a portion of your property taxes each year with your mortgage payment. Lenders often collect these payments in an escrow account and pay the taxes when they're due.

Pros and Cons

Pros

Flexibility. If you think you'll be in a better financial situation soon or are planning to move in the next few years, a 1-year ARM could be a good fit. You'll get a lower rate than with a fixed-rate loan, and you won't be locked into a long period of time.
Home Ownership. A mortgage allows you to borrow a large chunk of change to purchase a home, so you're not required to pay the full amount upfront.
Equity Building. As you make your mortgage payments, you build equity in your home. This is a valuable asset that you can tap into later to finance other expenses with a home equity loan or home equity line of credit.

Cons

Interest Rate Risk. A 1-year ARM's interest rate becomes variable after that first year, and it can adjust annually based on the index. If rates rise, your monthly payment could increase significantly.
Interest Costs. You'll pay a significant amount in interest over the life of the loan, which can increase the overall cost of your home.
Risk of Foreclosure. If you fail to make your mortgage payments, you could lose your home to foreclosure. This can severely damage your credit and finances.

How to Secure a 1-Year ARM

Check Your Credit. Obtain your credit report and check your credit score. Most lenders require a minimum credit score to approve you for a mortgage. Your DTI ratio should be 43% or less, and you should have at least 20% saved for a down payment.
Figure Your Budget. Use a mortgage calculator to determine what your monthly payment would be at different loan amounts, interest rates and down payments. Don't forget to factor in property taxes and insurance.
Get Pre-Approved. Shop around for a lender that offers a good rate and terms. You'll need to provide documentation to be pre-approved, which is a big leg up when you find a home you want to buy.
Get Quotes from Lenders. In addition to your pre-approved lender, shop around for other mortgage quotes to compare rates and fees.
Select Your Mortgage. Weigh the pros and cons of each offer, including interest rates, loan terms and additional costs. If you're happy with your lender's quote, consider locking in your interest rate to protect yourself from rate hikes before it's too late.
Apply. Give your lender detailed financial information and property details.
Underwriting. You'll be asked to provide additional documentation as needed. The lender will order an appraisal to ensure the property's value.
Close on Your Mortgage. Review the final loan terms, sign documents and pay closing costs. Once you've initialed the last document, you'll receive the keys to your new home.

Requirements

Credit Score. You'll typically need a minimum credit score of 620 to qualify for a conventional loan, though FHA loans have lower score requirements.
Down Payment. You'll need to put at least 3.5% down to qualify for a conventional loan, though 20% is common.
Cash Reserves. If you're using cash from a sale to buy a new home, you may need to show a certain number of months in cash reserves for the new home.
Liabilities. You'll need to disclose any outstanding liabilities, such as auto loans and student loans.
Employment. Gaps in employment or self-employment can be problematic. You may need to provide additional employment documentation.

Conditions

Interest Rate. You can get a 1-year ARM with an interest rate as low as 2.5% for the initial fixed period.
Closing Costs. In addition to your down payment, save for closing costs, which can total 2% to 5% of the home's purchase price.
Loan Amount. You can borrow as little as $100,000 or as much as $1,000,000 or more, depending on your lender and profile.

Ways to Access Funds

Certified Check. Your mortgage funds can be issued as a certified check, which you'll need to cash to pay the seller.
Escrow. If you're paying off other expenses at closing, such as a home appraisal or title insurance, your lender can disburse funds into escrow.
Wire Transfer. Your lender may also allow wire transfer of funds.

Considerations

Interest Rate and APR. Pay attention to both the annual percentage rate (APR) and interest rate to determine your total loan cost.
Down Payment. Find out the minimum down payment required and how it affects your monthly payment and costs.
Closing Costs. Review all closing costs to ensure you're prepared for them.
Prepayment Penalties. Check your loan documents for prepayment penalties in case you pay off the mortgage early.
Private Mortgage Insurance (PMI). If you put less than 20% down, you'll need PMI. Review the policy and premium amount.

Reasons for Rejection

Bad Credit. A poor credit history can prevent approval.
High Debt-to-Income Ratio (DTI). A DTI over 43% may indicate you're taking on too much debt.
Low Income. Failure to consistently document income can cause rejection.
Small Down Payment. A lower down payment increases lenders' risk.
Home Equity Loans. Borrow against your home's value, often for home improvements or debt consolidation.
Real Estate Agents. Some agents offer lease/option to buy programs, which allow you to pay rent and work towards an ownership option while building equity.
401(k). You can borrow from your 401(k) and other retirement accounts, which may offer lower interest rates than other personal loans.
Bridge Loans. Short-term loans that "bridge" the gap between the sale of one home and the purchase of another.

Editorial Opinion

A 1-Year ARM can be tempting with its low introductory interest rates and affordable monthly payments, but borrowers should exercise caution. The adjustable rate can increase dramatically after the initial fixed period, and the rising payment could be difficult to manage. Weigh the short-term benefits against the long-term risks before choosing a 1-Year ARM for your situation.

Important

Keeping your Debt-to-Income (DTI) ratio below 30-40% of your monthly income is crucial. This will help you avoid potential financial problems in the future. Additionally, always assess the necessity and feasibility of taking a loan, ensuring you can comfortably manage its repayment.

How to Choose a Mortage Lender

Check Associations. Look for lenders who are members of reputable organizations, such as the Mortgage Bankers Association (MBA). Membership in these organizations can indicate a higher level of reliability and professionalism.
Review Terms and Conditions. Carefully examine all the terms and conditions of the mortgage contract. Pay special attention to details like the loan term, fixed vs. variable interest rates, and any prepayment penalties.
Interest Rates and Costs. Scrutinize the interest rates and ensure that your contract includes a detailed breakdown of the total cost of the mortgage, including closing costs, origination fees, and any other charges.
Right of Rescission. Remember you can utilize your right of rescission, which typically allows you to cancel the mortgage within three days after signing the agreement. Additionally, use the "cooling-off" period to thoroughly review the contract and make an informed decision before finalizing the mortgage agreement.
Compare Offers. Shop around and compare offers from multiple lenders to find the best rates and terms that suit your financial situation.

Additional resources

To learn more about mortgages and best practices, check out some of the following resources: