Fixed Period
Your rate is locked for 5, 7, or 10 years. Payments are predictable and lower than a comparable fixed-rate loan. This is where most of your savings happen.
ARM
Lower your payment now with a rate that adjusts later
An adjustable-rate mortgage can save you thousands during the initial fixed period. With rate caps protecting you from large swings, ARMs are built for borrowers with 3-to-10-year ownership plans who want the lowest possible payment today.
See your ARM rateNo credit impact | Takes 2 minutesAt a glance
Initial RateLower than fixedSave from day one
Fixed Period5, 7, or 10 yearsRate stays locked
Rate CapsProtected by capsLimits on adjustments
Best ForShort-to-medium term3-10 year ownership
How an ARM works
An adjustable-rate mortgage moves through three distinct stages over its life.
Phase 1
Phase 2
Adjustment Period
After the fixed period, your rate adjusts annually based on a benchmark index (like SOFR) plus your lender's margin. Payments may go up or down depending on market conditions.
Phase 3
Rate Caps
Three layers of protection limit how much your rate can change: an initial cap on the first adjustment, a periodic cap on each subsequent adjustment, and a lifetime cap on the total increase.
ARM vs Fixed-Rate
| Adjustable-Rate | Fixed-Rate | |
|---|---|---|
| Initial rate | ~0.5-1.0% lower | Higher |
| Payment years 1-7 | Lower, fixed payment | Higher, fixed payment |
| Payment years 8-30 | Adjusts annually | Same as year 1 |
| Rate predictability | Predictable during fixed period | Fully predictable |
| Best if you plan to stay | 3-10 years | 10+ years |
| Total interest on $400K loan | Lower if you sell/refi early | ~$558,000 at 7% |
| Risk level | Moderate (cap-protected) | Low |
Understanding ARM terminology
Knowing these terms helps you evaluate ARM offers and compare lenders.
Index (SOFR / Prime)
The benchmark rate your ARM is tied to. SOFR (Secured Overnight Financing Rate) has replaced LIBOR as the standard index. When the index rises, your rate may increase at the next adjustment.
Margin
A fixed percentage the lender adds to the index to determine your adjusted rate. For example, if SOFR is 4.0% and your margin is 2.5%, your adjusted rate would be 6.5%. The margin never changes.
Initial Adjustment Cap
The maximum amount your rate can increase at the first adjustment after the fixed period ends. Typically 2% above your initial rate.
Periodic Cap
Limits how much the rate can change at each subsequent adjustment. Usually 1-2% per adjustment period.
Lifetime Cap
The absolute maximum your rate can reach over the entire life of the loan. Commonly 5-6% above your starting rate.
Floor Rate
The minimum rate your ARM can drop to, regardless of how low the index goes. Often set equal to your margin.
When does an ARM make sense?
1
You plan to sell in 5-7 years
If you know you will move before the fixed period ends, you capture the lower rate without ever facing an adjustment.
2
You expect your income to grow
Early-career professionals who anticipate raises can benefit from lower payments now and handle potential increases later.
3
Rates are high and expected to drop
When market rates are elevated, an ARM lets you avoid locking in a high fixed rate. If rates fall, your adjustments could actually lower your payment.
4
You are buying a starter home
First-time buyers who plan to upgrade within a few years save thousands during the fixed period and sell before adjustments begin.
5
You are relocating for work
A temporary assignment or contract role means you will likely sell the home within the fixed period, making the lower ARM rate a clear advantage.
ARM savings example
See the real dollar difference on a $400,000 loan over the first five years.
30-Year Fixed at 7.0%$2,661/moStays the same for 30 years
vs
5/1 ARM at 6.0%$2,398/moFixed for the first 5 years
Savings in the first 5 years$15,780
Based on a $400,000 loan amount. ARM rate assumes 5/1 structure. Actual rates vary by borrower profile and market conditions.
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Mortgage Payment Calculator
Estimate your monthly payment with taxes, insurance, and PMI
$
3%50%
4%10%
$2,632
Estimated Monthly Payment
Principal & interest $2,076
Property tax (0.60%) $200
Insurance ($4,280/yr) $357
Loan amount$320,000
Total interest paid$427,185
Frequently asked questions
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