“An ARM can go up without limit.”
Caps Put A Ceiling On It
Every ARM has caps on the first adjustment, each adjustment after, and over the life of the loan. You know the worst case before you sign.
An ARM gives you a fixed rate for 5, 7, or 10 years, usually starting lower than a 30 year fixed, then adjusts. The caps decide how much it can change. I’ll walk you through exactly what your worst case looks like before you choose one.
An adjustable rate mortgage, or ARM, has a fixed rate for an initial period, usually 5, 7, or 10 years, then adjusts on a set schedule based on an index plus a margin. Caps limit how much the rate can change at each adjustment and over the life of the loan.
The name tells you how long the rate stays fixed and how often it changes after. A 5/6 ARM is fixed for 5 years and then adjusts every 6 months. A 7/6 is fixed for 7 years, and a 10/6 is fixed for 10. When it adjusts, the new rate is the index plus a margin set in your loan.
Caps limit how far the rate can move. There's a cap on the first adjustment, a cap on each adjustment after that, and a lifetime cap. Your loan documents spell out the exact caps, so you always know the worst case before you sign.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends. If you're likely to move in five to seven years for work, family, or a bigger home, you may only ever pay the fixed rate.
It's worth a look when the ARM rate is meaningfully lower than a 30 year fixed. That gap is what you're getting paid to take on the risk. If the two rates are close, the fixed rate is usually the better deal.
An ARM is risky if you plan to stay long term, if your budget couldn't handle a higher payment, or if your plan depends on refinancing later. Rates may not cooperate when you need them to. Before you choose one, look at the payment at the highest rate the caps allow and make sure you could live with it.
“An ARM can go up without limit.”
Every ARM has caps on the first adjustment, each adjustment after, and over the life of the loan. You know the worst case before you sign.
“ARMs are what caused 2008.”
Today’s conventional ARMs are fully documented and you qualify with room for a rate increase built in.
“My rate can only go up.”
If the index drops, your rate can come down within the caps.
This is the worst case on a typical 5/6 conventional ARM with 2/1/5 caps, shown above your starting rate. It never goes higher than this.
Shown as points above your starting rate.
Fixed 5 years, then adjusts every 6 months. Usually 2/1/5 caps.
Fixed 7 years, then adjusts every 6 months. Usually 5/1/5 caps.
Fixed 10 years, then adjusts every 6 months. Usually 5/1/5 caps.
An ARM is a tool for a specific plan. Here’s when it fits and when a fixed rate is safer.
My take: only take an ARM if you can live with the worst case, not just the starting payment. If the worst case would break your budget, the lower start rate isn’t worth it.
What to think through before you pick your term.
If you’ll stay past the fixed period, plan on the payment changing.
Run the payment at the lifetime cap. If you can’t carry it, pass.
The caps and margin decide how your rate moves. Get both in writing.
Rates or values can change. Have a plan that doesn’t depend on a refinance.
Here’s exactly what happens after you reach out.
Tell us the price range you’re shopping, your credit range, and how much you have saved. We start with a soft credit check, so your score isn’t touched.
Start My Pre-ApprovalSend your pay stubs, W2s, and bank statements. We compare your loan options side by side and send a letter with your max price to hand your Realtor.
Start My Pre-ApprovalOnce you’re under contract, we order the appraisal, work with title, and take your file through underwriting to closing day.
Start My Pre-Approval
An adjustable rate mortgage, or ARM, has a fixed rate for an initial period, usually 5, 7, or 10 years, then adjusts on a set schedule based on an index plus a margin. Caps limit how much the rate can change at each adjustment and over the life of the loan.
The first number is how many years the rate is fixed, and the second is how often it adjusts after that, in months. A 5/6 ARM is fixed for 5 years, then adjusts every 6 months. 7/6 and 10/6 ARMs work the same way with 7 and 10 year fixed periods.
Caps set the limits. On a typical 5/6 conventional ARM with 2/1/5 caps, the rate can rise up to 2% at the first adjustment, up to 1% at each adjustment after that, and never more than 5% above the starting rate. 7/6 and 10/6 ARMs usually have 5/1/5 caps, so the first adjustment can be up to 5%.
An index plus a margin. Most conventional ARMs now use the 30 day average SOFR as the index. The margin is a fixed number set when you get the loan. Your new rate is the index plus the margin, limited by your caps.
Yes. If the index falls, your rate can adjust down too, within the caps. Most ARMs won't go below the margin.
On shorter ARMs it can be. For a 5/6 ARM, lenders typically qualify you at the higher of the start rate plus 2% or the fully indexed rate, to make sure you can handle an increase.
When you expect to sell or refinance before the fixed period ends, and you want a lower starting rate in the meantime. If you plan to stay long term and can't absorb a higher payment, a fixed rate is usually safer.
Usually, yes, but it isn't guaranteed. You'll have to qualify at that time, and rates and your home's value may have changed. Don't count on a refinance as your only plan.
Yes. FHA and VA both offer adjustable rate options with their own cap structures. Conventional ARMs are the most common.
The term changes your payment and your risk. These are the options buyers compare it with.
The lowest payment of any fixed loan, and it never changes.
Learn More TermOwn your home in half the time with far less interest.
Learn More BuyWhere most ARMs live, with 3% down for first time buyers.
Learn More BuyARMs are common on loans above the $832,750 limit.
Learn More RefinanceMove out of an ARM into a fixed rate, or the other way.
Learn More BuyCompare every purchase loan side by side.
Learn MoreFifteen minutes gets you a real number instead of a guess, and the soft credit check costs your score nothing.
Real Closings
Real families we have helped get from pre-approval to keys in hand.
Pick one and I'll match you to the right loan, the real numbers, and the next step. Takes about 60 seconds — no credit pull, no obligation.