A fixed-rate mortgage keeps the same rate and principal and interest payment for the whole loan. An adjustable-rate mortgage (ARM) starts with a lower fixed rate for 5, 7 or 10 years, then adjusts every six months with the market. ARMs make sense mainly if you’re confident you’ll sell or refinance before the fixed period ends.
Example: on a $360,000 loan, a 5/6 ARM at 6.50% costs $2,275 a month, about $198 less than a 30-year fixed at 7.32%. That’s about $11,850 saved over five years. But if rates rise, the payment could reach $2,714 after the first reset and up to $3,426 at the loan’s rate cap.
Key takeaways
- The first number in a 5/6 or 7/6 ARM is the fixed period in years. The 6 means the rate then adjusts every six months.
- Caps limit how much the rate can rise. A common 5/6 ARM has 2/1/5 caps: 2 points at the first reset, 1 point each later reset, and 5 points over the life of the loan.
- After the fixed period, your rate becomes an index, usually SOFR, plus a margin set in your loan documents.
- Choose an ARM only if you can afford the payment at the lifetime cap, or have a solid plan to sell or refinance.
In this guide: How ARMs work · Example · Rate caps · Pros and cons · Who should choose each · Qualifying · FAQ
How an adjustable-rate mortgage works
| ARM type | Fixed period | Adjusts after that | Common caps |
|---|---|---|---|
| 5/6 ARM | 5 years | Every 6 months | 2/1/5 |
| 7/6 ARM | 7 years | Every 6 months | 5/1/5 |
| 10/6 ARM | 10 years | Every 6 months | 5/1/5 |
Most ARMs are 30-year loans. When the fixed period ends, the new rate equals the index, usually the 30-day average SOFR, plus a margin, often around 2.75 to 3 percentage points. The margin never changes. Your loan documents also set a floor, usually the margin, below which the rate can’t fall.
Older ARMs were called 5/1 or 7/1 because they adjusted once a year and were tied to LIBOR, which ended in 2023.
Example: 5/6 ARM vs. 30-year fixed
Both loans are $360,000 for 30 years. The ARM rate is an example; ARM pricing varies more by lender than fixed rates do.
| 30-year fixed at 7.32% | 5/6 ARM starting at 6.50% | |
|---|---|---|
| Payment, years 1 to 5 | $2,473 | $2,275 |
| Saved over 5 years | – | $11,850 |
| Balance after 5 years | $340,007 | $337,000 |
| Payment if the rate resets to 7.50% | $2,473 (unchanged) | $2,490 |
| Payment at the first-reset cap, 8.50% | $2,473 | $2,714 |
| Payment at the lifetime cap, 11.50% | $2,473 | $3,426 |
The ARM saves money only as long as you keep it through the fixed period or rates stay low. If you’d sell within five years, it’s a clear win. If you keep the loan and rates rise, the extra cost can quickly erase the savings.
Payment Calculator: Compare a Fixed and a Starting ARM Rate
Full guide: mortgage payment calculator with taxes, insurance and PMI
Your full monthly payment: principal, interest, property tax, homeowners insurance, PMI or FHA mortgage insurance, and HOA dues.
Loan balance and what you pay over time
Each year’s principal and interest, and the balance left at year end.
Year-by-year amortization table
| Year | Principal | Interest | Balance |
|---|
ARM rate caps explained
Caps are written as three numbers. For 2/1/5 caps on a loan starting at 6.50%:
- Initial cap (2): at the first adjustment, the rate can rise to no more than 8.50%.
- Periodic cap (1): each later adjustment can add at most 1 point.
- Lifetime cap (5): the rate can never exceed 11.50%.
Caps also work downward in most loans, so your rate can fall if the index falls, though not below the floor. Your Loan Estimate shows the highest possible payment and when it could happen, so you don’t have to calculate it yourself.
Pros and cons of ARMs
| ARMs | Fixed-rate mortgages |
|---|---|
| Lower starting rate and payment | Higher starting rate |
| Payment can rise sharply after the fixed period | Principal and interest never change |
| Can fall without refinancing if rates drop | Need to refinance to benefit from lower rates |
| Good for short ownership | Good for long ownership |
| Harder to budget long term | Easy to budget |
Taxes and insurance can change on both. See why escrow payments change.
Who should choose a fixed rate or an ARM
An ARM can fit if you:
- expect to move within the fixed period, for a job transfer or growing family;
- have a large loan, like a jumbo loan, where a lower rate saves a lot each month;
- expect your income to rise and could handle the capped payment.
A fixed rate is better if you:
- plan to stay 10 years or more;
- have a tight budget with little room for a higher payment;
- prefer certainty. Refinancing to a lower rate later is always an option. Our refinance guide shows when it pays off.
Qualifying for an ARM
Lenders don’t qualify you at the low starting rate. For ARMs with a fixed period of five years or less, Fannie Mae requires lenders to use the higher of the start rate plus 2 points or the fully indexed rate. For longer fixed periods, they can use the start rate. So a 5/6 ARM may not help you qualify for a bigger loan. Check your numbers with our affordability calculator.
Frequently asked questions
Is an ARM a good idea in 2026?
It can be if the starting rate is meaningfully lower than fixed rates and you plan to sell or refinance before the reset. If the difference is only a few tenths of a point, the fixed rate’s certainty is usually worth it.
Can I refinance an ARM into a fixed rate?
Yes, if you qualify at the time. The risk is that rates are higher or your finances have changed when you need to refinance.
What is the difference between a 5/1 and a 5/6 ARM?
Both are fixed for five years. A 5/1 then adjusts once a year, usually tied to the now-retired LIBOR or Treasury rates, while a 5/6 adjusts every six months and is tied to SOFR.
Do ARMs have prepayment penalties?
Almost never. Federal ability-to-repay rules don’t allow prepayment penalties on adjustable-rate loans for a home you live in.
The bottom line
A fixed rate is the safe default for most buyers. An ARM is a calculated bet that you’ll move or refinance before the reset, so take one only if you could still afford the payment at the cap.
Estimates only. HomeAffordLab is not a lender and does not provide financial advice. This page may contain ads. See our Advertising Disclosure.
Sources: CFPB: Consumer Handbook on Adjustable-Rate Mortgages · Fannie Mae Selling Guide B2-1.4-02, Adjustable-rate mortgages, and ARM plan matrix · Freddie Mac Primary Mortgage Market Survey, Oct 22, 2026 · 12 CFR 1026.43 (qualified mortgage rules)