ARM

· 3 min read
An adjustable-rate mortgage (ARM) starts with a lower fixed interest rate for an introductory period — usually 5, 7, or 10 years — then adjusts…

An adjustable-rate mortgage (ARM) starts with a lower fixed interest rate for an introductory period — usually 5, 7, or 10 years — then adjusts periodically based on a market index, which means your monthly payment can go up or down. ARMs are a calculated bet: you get a cheaper rate now in exchange for uncertainty later.

How ARMs Work

The name tells you the structure. A 5/6 ARM means a fixed rate for 5 years, then adjustments every 6 months. A 7/1 ARM is fixed for 7 years, adjusting annually after that. The adjustment is tied to an index (SOFR is the most common today) plus a margin (typically 2.50-3.00%). If SOFR is 4.00% and your margin is 2.75%, your adjusted rate would be 6.75%.

Every ARM has rate caps that limit how much your rate can change. The standard cap structure is 2/1/5 — meaning the rate can’t jump more than 2% at the first adjustment, more than 1% at each subsequent adjustment, and no more than 5% above your initial rate over the loan’s life.

The Cost Impact

A 5/1 ARM might start at 6.25% while the 30-year fixed is 7.00%. On a $400,000 loan, that’s $2,462/month versus $2,661 — saving you $199/month or $11,940 over the 5-year fixed period. That’s real money.

But here’s the risk. If rates rise and your ARM adjusts to 8.25% (the 2% first-adjustment cap), your payment jumps to $3,001 — $540 more than the fixed rate would’ve been. After year 6, it could climb to 9.25% (the 1% annual cap), hitting $3,310/month.

Worst-case scenario with a 5% lifetime cap: your rate hits 11.25% and your payment balloons to $3,949/month. That’s $1,288 more than your initial ARM payment.

When ARMs Make Sense

ARMs are smart when you’re confident you’ll sell or refinance before the fixed period ends. If you’re buying a starter home and plan to move in 4-5 years, the ARM saves money with little actual risk. Military families who PCS every few years are classic ARM candidates.

ARMs also make sense when the spread between ARM and fixed rates is unusually wide (1%+). The bigger the initial savings, the more cushion you have if plans change.

When ARMs Are Dangerous

If you’re buying your forever home and plan to stay 15+ years, a fixed rate provides certainty that’s worth the premium. If your budget is tight and a payment increase of $300-$500/month would cause financial stress, the ARM risk isn’t worth it. And if you’re counting on being able to refinance later, remember: refinancing requires qualifying, and your financial situation or rates might not cooperate when the time comes.

Not sure which is right for you? See our fixed-rate vs. ARM comparison for a full breakdown.

Frequently Asked Questions

Can I refinance an ARM into a fixed-rate mortgage?

Yes, and many ARM borrowers plan to do exactly that. But you’ll need to qualify again — credit check, income verification, appraisal, and all the usual costs. If rates have risen significantly, you might be refinancing into a higher fixed rate than the ARM you’re leaving. Use our refinance calculator to see if the numbers work.

What index do most ARMs use now?

Most ARMs have transitioned to SOFR (Secured Overnight Financing Rate) after LIBOR was discontinued in 2023. SOFR is based on overnight Treasury repurchase transactions and tends to be slightly less volatile than LIBOR was. Your loan documents specify which index your ARM follows and where to find the current rate. Compare ARM and fixed scenarios on our loan comparison tool.