Written and reviewed by Jack Gladden, Senior Loan Officer, NMLS #1470164
Updated · 4-minute read · How these guides are written
Adjustable-rate mortgages in brief
- What it is
- A mortgage with a fixed rate for the first few years, then a rate that adjusts on a set schedule for the rest of the loan.
- The names
- A 7/6 ARM is fixed for seven years, then adjusts every six months; a 5/1 is fixed for five, then adjusts yearly.
- How it adjusts
- The new rate is an index, often SOFR, plus a fixed margin, limited by caps.
- Caps
- Limits on how much the rate can rise at the first adjustment, at each later one, and over the life of the loan.
- Why choose one
- A lower starting rate than a comparable fixed loan, which helps if you’ll sell or refinance before it adjusts.
- The risk
- If rates are higher when it adjusts, so is your payment, up to the caps.
How an ARM works.
Every ARM has four parts: an initial fixed period, an index, a margin and a set of caps. During the fixed period your rate doesn’t change. After it, the lender resets the rate on the schedule in your loan:
New rate = index + margin, within the caps
The index moves with the market; the margin is fixed for the life of the loan.
- Index
- A published market rate the loan follows, most often SOFR on newer loans.
- Margin
- A fixed number of percentage points added to the index, set when you take the loan.
- Adjustment period
- How often it resets after the fixed period, often every six months or every year.
Rate caps, and your worst case.
Caps are usually written as three numbers. On 5-year ARMs a common structure is 2/1/5; 7- and 10-year ARMs often use 5/1/5, which allows a larger first adjustment.
| Cap | What it limits (for 2/1/5) |
|---|---|
| Initial adjustment cap | The first reset can move the rate at most 2 percentage points from your starting rate. |
| Periodic cap | Each later reset can move it at most 1 point. |
| Lifetime cap | The rate can never go more than 5 points above your starting rate. |
The lifetime cap tells you your worst case: your starting rate plus five points. I’ll show you the payment at that rate as well as at the start, so you know you could afford it. Caps work in both directions on most loans, so if rates fall your payment can fall too.
Want to see your worst-case payment?
Tell me the price, your down payment and how long you expect to stay. I’ll compare an ARM with a fixed rate, including the highest the payment could go.
Common ARMs.
| Loan | Fixed for | Then adjusts |
|---|---|---|
| 5/6 or 5/1 ARM | 5 years | Every 6 months or every year |
| 7/6 or 7/1 ARM | 7 years | Every 6 months or every year |
| 10/6 or 10/1 ARM | 10 years | Every 6 months or every year |
ARMs are available on conventional, FHA, VA and jumbo loans; interest-only versions exist for some investors.
When an ARM makes sense.
A good fit if
- You expect to sell or refinance before the fixed period ends
- You want the lower starting payment and could handle the worst case
- Your income is likely to rise
- You’re buying a large loan where the starting rate difference is big
Look elsewhere if
- You plan to stay for decadesBetter: a 30-year fixed
- A higher payment later would strain youBetter: a fixed rate, even if it starts higher
- You’re counting on refinancing laterBetter: make sure you’d qualify even if rates rise
The trade-offs.
- Payment uncertainty. After the fixed period, your payment can rise at each reset, up to the caps.
- Refinancing isn’t guaranteed. If rates rise or your income or home value falls, refinancing out may be harder.
- More to understand. Index, margin and caps differ by loan; compare them, not just the starting rate.
How we get started.
Tell me your timeline
How long you’ll keep the home and the loan.
I compare
Fixed and ARM options, with the starting payment and the worst-case payment for each.
Choose and lock
With the caps, margin and index explained in writing.
Close
And I’ll flag the date your rate first adjusts so you can plan.
Adjustable-rate mortgages, answered plainly.
Is it ever a good idea to get an adjustable-rate mortgage?
Yes, when you’ll likely sell or refinance before the fixed period ends, or when you could comfortably afford the worst-case payment.
Is a 5-year ARM a good idea?
If you’re fairly sure you’ll move or refinance within five years, it can save money. If not, a 7- or 10-year ARM, or a fixed rate, lowers the risk.
What is the downside of an adjustable-rate mortgage?
The payment can rise after the fixed period if rates are higher, up to the loan’s caps.
Can I pay off an ARM early?
Yes. Federal rules don’t allow a prepayment penalty on an adjustable-rate loan for a home you live in, so you can sell or refinance into a fixed rate at any time.
Do lenders still offer adjustable-rate mortgages?
Yes. 5/6, 7/6 and 10/6 ARMs are common on conventional and jumbo loans, and FHA and VA offer ARMs too.
What is today’s adjustable mortgage rate?
It depends on the loan type, fixed period, credit and down payment. I’ll quote current ARM and fixed rates side by side for your file.
Conventional
Jumbo
Refinance
Cash-out refinance