Last updated: October 5, 2026 · All rates are examples for illustration, not current market rates.
An adjustable-rate mortgage (ARM) usually starts with a lower rate than a 30-year fixed loan. The catch is that the rate can rise after the introductory period. Whether that trade-off is smart depends on how long you will keep the loan and how much payment risk you can handle. Here is what the math shows.
How an ARM works
The most common ARM today is the 5/6 ARM: the rate is fixed for five years, then adjusts every six months. Other versions fix the rate for 7 or 10 years. After the fixed period, your new rate equals an index (usually SOFR, the Secured Overnight Financing Rate) plus a fixed margin, limited by the loan’s caps.
A typical cap structure is 2/1/5: the rate can rise at most 2 percentage points at the first adjustment, 1 point at each later adjustment, and 5 points over the starting rate for the life of the loan. Your Loan Estimate shows the exact caps and the highest possible payment.
Example: 5/6 ARM vs. 30-year fixed on $300,000
| 30-year fixed at 6.5% | 5/6 ARM starting at 5.75% | |
|---|---|---|
| Payment, years 1–5 | $1,896.20 | $1,750.72 |
| Savings over 5 years | – | $8,729 |
| Balance after 5 years | $280,832.93 | $278,286.56 |
For the first five years, the ARM saves $145.49 a month, or $8,729 in total, and also leaves you with a balance about $2,546 lower because less of each payment goes to interest.
What happens after year five
When the fixed period ends, the payment is recalculated on the remaining $278,286.56 over the remaining 25 years at the new rate:
| New rate | New monthly P&I | Compared with fixed |
|---|---|---|
| 5.75% (unchanged) | $1,750.72 | $145.48 less |
| 6.75% | $1,922.71 | $26.51 more |
| 7.75% (maximum first adjustment) | $2,101.98 | $205.78 more |
| 8.75% | $2,287.92 | $391.72 more |
With 2/1/5 caps, the rate in this example could rise to 7.75% at the first adjustment, then by up to 1 point every six months, to a lifetime maximum of 10.75%. If rates rose sharply, a few years of higher payments could wipe out the early savings.
When an ARM can make sense
- You are confident you will sell or move before the fixed period ends, for example because of a job relocation.
- The rate difference versus a fixed loan is large enough to matter.
- You could afford the payment at the maximum capped rate without hardship.
- You plan to make large extra payments during the fixed period, reducing the balance before any adjustment.
When a fixed rate is the safer choice
- You expect to stay in the home for a long time.
- Your budget is tight; a higher payment later would cause real stress. Check how much house you can afford.
- You value certainty. A fixed payment never changes, though taxes and insurance can.
Remember that refinancing out of an ARM later is possible, but not guaranteed: it depends on your credit, income, home value and market rates at the time, and it comes with new closing costs.
Compare the numbers yourself
Use our mortgage calculator to compare the payment at the starting rate and at the maximum capped rate. Small rate differences add up; see what 1% extra interest really costs.
Frequently asked questions
What does 5/6 ARM mean?
A 5/6 ARM has a fixed rate for the first five years. After that, the rate adjusts every six months based on an index, usually SOFR, plus a fixed margin, within the limits set by the loan’s caps.
What are ARM rate caps?
Caps limit how much the rate can rise. A 2/1/5 cap structure means the rate can rise by up to 2 percentage points at the first adjustment, 1 point at each later adjustment, and 5 points in total over the start rate.
Is an ARM a good idea?
An ARM can save money if you are confident you will sell or refinance before the fixed period ends. It is risky if you might keep the loan longer and could not afford the payment at the maximum capped rate.
Can I refinance out of an ARM?
Yes, if you qualify at the time. But refinancing depends on your credit, income, home value and market rates when you need it, so it should not be your only plan.
Sources: CFPB: Buying a House; CFPB: Fixed-rate vs. adjustable-rate mortgages. Example calculations by ToolStackIA.
This article is for educational purposes only and is not financial advice. Loan programs, rates and rules change; confirm details with your lender or a HUD-approved housing counselor.