Glossary term
3/27 ARM
A 3/27 ARM is a 30-year adjustable-rate mortgage with a fixed rate for three years and adjustable payments for the remaining 27 years.
Updated
Read time
What Is a 3/27 ARM?
A 3/27 ARM is a 30-year adjustable-rate mortgage with a fixed interest rate for the first three years and an adjustable rate for the remaining 27 years. After the fixed period ends, the rate can reset based on the loan's index, margin, adjustment schedule, and caps.
The structure can make the early payment look more affordable than a comparable fixed-rate mortgage, but it shifts future interest-rate risk to the borrower. The key question is whether the borrower can handle the payment after the introductory period ends.
Key Takeaways
- A 3/27 ARM has a three-year fixed period followed by 27 years of adjustable-rate payments.
- The reset rate usually depends on an index plus a lender margin.
- Rate caps limit adjustments but do not remove payment risk.
- The loan can create payment shock if the adjusted rate is much higher than the starter rate.
- Borrowers should compare the fully indexed payment, not only the initial payment.
How a 3/27 ARM Works
During the first three years, the interest rate is fixed. Once that period ends, the lender recalculates the rate on the schedule described in the mortgage note. Many ARMs reset by adding a fixed margin to a benchmark index, then applying caps that limit how much the rate can rise at the first adjustment, at later adjustments, or over the life of the loan.
A 3/27 ARM may appeal to someone who expects to sell or refinance before the first adjustment. It becomes riskier when the borrower may keep the loan well beyond year three or when refinancing depends on assumptions about home value, income, credit, or future market rates.
What to Review Before Signing
Feature | Question to ask |
|---|---|
Initial fixed period | Exactly when can the first rate change? |
Index | Which benchmark drives future rate changes? |
Margin | How much does the lender add to the index? |
Adjustment caps | How much can the rate rise at each reset and over the loan's life? |
Payment scenario | Can the household afford the payment if rates rise? |
Why It Can Be Risky
The main risk is not the first three years. It is the payment path after the rate begins adjusting. If the introductory rate is low and market rates are higher by the first reset, the monthly payment can increase quickly. That can strain cash flow, especially if the borrower expected refinancing to be easy and it is not.
A 3/27 ARM also concentrates decision risk around a short window. The borrower may need to sell, refinance, or absorb a higher payment soon after the third year. That short runway can be uncomfortable if personal finances or housing-market conditions change.
3/27 ARM Versus 5/6 ARM
Loan type | Initial fixed period | Typical later adjustment pattern |
|---|---|---|
3/27 ARM | 3 years | Adjustable for the remaining 27 years |
5/6 ARM | 5 years | Usually adjusts every six months after the fixed period |
The names describe timing, not safety. A longer fixed period can give the borrower more time before the first reset, but the actual risk still depends on caps, index, margin, payment size, and how long the borrower keeps the loan.
The Bottom Line
A 3/27 ARM is a 30-year mortgage with three years of fixed-rate payments followed by 27 years of adjustable-rate payments. It can reduce early payments, but borrowers should judge it by the reset mechanics and worst-case affordability rather than the starter rate alone.