How an ARM's rate changes
An adjustable-rate mortgage starts with a fixed rate, usually lower than a 30-year fixed, for 3, 5, 7 or 10 years. After that, at each adjustment, the lender adds a fixed margin to a market index, such as the 30-day average SOFR, and the payment is recalculated on your remaining balance so the loan still ends on time. Three rate caps limit how far it can move:
- First adjustment cap: the most the rate can change the first time, commonly 2 or 5 percentage points.
- Later adjustment caps: the most it can change at each adjustment after that, commonly 1 or 2 points.
- Lifetime cap: the most it can ever rise above the starting rate.
Caps are written like 2/1/5. The calculator walks the rate toward your estimate one adjustment at a time, never moving further than the caps allow, and never below the margin.
A worked example: 5/6 ARM vs 30-year fixed
Borrow $400,000 on a 5/6 ARM at 6% with 2/1/5 caps, or a 30-year fixed at 6.75%. The ARM's payment for five years is $2,398.20, versus $2,594.39 for the fixed loan: $196.19 a month less. If rates rise as far and as fast as the caps allow, to 11%, the ARM payment reaches $3,630.26.
Which one costs less depends on how long you keep the loan. This table compares what you'd have paid plus what you'd still owe, if you sold or refinanced after each period:
| Keep the loan | ARM rate stays at 6% | ARM rate goes to 7.5% | Worst case (11%) |
|---|---|---|---|
| 5 years | ARM ahead $15,057 | ARM ahead $15,057 | ARM ahead $15,057 |
| 7 years | ARM ahead $21,072 | ARM ahead $9,903 | Fixed ahead $4,911 |
| 10 years | ARM ahead $30,004 | ARM ahead $2,155 | Fixed ahead $51,737 |
| 15 years | ARM ahead $44,301 | Fixed ahead $10,520 | Fixed ahead $129,603 |
Calculated with the same engine as the calculator above. Rates are examples, not quotes. Closing costs are assumed equal for both loans.
When an ARM can make sense
- You'll likely move or refinance before it adjusts. The lower start rate is a pure saving if you're gone before year five, seven or ten.
- You could afford the worst case. Look at the highest possible payment above. If it would break your budget, the ARM is a bet on rates, not a plan.
- Don't count on refinancing. Refinancing needs rates to fall, your income and credit to hold up, and enough equity. None of those is guaranteed.
- Pay extra during the fixed period. Every adjusted payment is recalculated on the balance you owe then, so extra principal now shrinks the future payment. The extra payment calculator shows what extras do.
Before you sign, read the ARM section of your Loan Estimate, explained in the CFPB's Loan Estimate explainer, and compare the fixed-rate option side by side. Related: 15 vs 30 year mortgage calculator and refinance break-even calculator.
Questions people ask
What does 5/6 or 5/1 ARM mean?
The first number is how many years the starting rate is fixed. The second is how often it can change after that: 6 means every six months, 1 means once a year. Many newer ARMs tied to SOFR adjust every six months.
What are ARM rate caps?
Caps limit how much the rate can move. The initial cap applies at the first adjustment (commonly 2 or 5 percentage points), the periodic cap at each later adjustment (commonly 1 or 2), and the lifetime cap limits the total rise over the loan. A 2/1/5 loan can rise 2 points at first, 1 point per adjustment after that, and no more than 5 points above the start rate.
How is my new ARM rate set?
At each adjustment the lender adds the margin to the current index, such as the 30-day average SOFR, then applies the caps. The margin stays the same for the life of the loan and is shown on your Loan Estimate.
Is an ARM a good idea?
It can be if you're confident you'll sell or refinance before the fixed period ends, or if you could comfortably afford the highest payment the caps allow. It's risky if you'd be stretched by the payment after adjustment and are relying on rates falling to refinance.
Can I pay extra on an ARM?
Usually, yes. When an ARM adjusts, the new payment is calculated on the balance you owe then, so extra principal paid during the fixed period lowers every adjusted payment. Use the extra payment calculator to model it.
For education and estimates only; not financial, tax or legal advice. Your lender's figures are final. See How we calculate.