Reviewed by Jeff Shin, NMLS #1041652. Updated .
How an ARM works
The first number in an ARM’s name is the fixed period, usually 5, 7, or 10 years. The second number is how often the rate adjusts after that. A 5/1 ARM adjusts once a year after five years. A 5/6 ARM adjusts every six months, which is how most newer ARMs are built.
After the fixed period, the new rate is an index plus a margin. The index moves with the market; most new ARMs use SOFR, the Secured Overnight Financing Rate. The margin is fixed in your note for the life of the loan. The CFPB explains both: index and margin.
Rate caps: how high it can go
Three caps limit the changes: how much the rate can move at the first adjustment, at each later adjustment, and over the life of the loan. They are often written as three numbers, such as 2/1/5. Page 2 of your Loan Estimate has an Adjustable Interest Rate table that shows the highest rate the loan can reach and when. Read it before you compare ARM rates. More from the CFPB: reading the Loan Estimate.
ARM rates vs. fixed rates
An ARM usually starts below a 30-year fixed rate, but the gap changes with the market and is sometimes small. A useful check is the fully indexed rate: today’s index plus your margin. That is roughly where the loan would land if it adjusted today. Compare both against the weekly 30-year and 15-year fixed benchmark.
When an ARM makes sense, and when it does not
- It can fit when you expect to sell or refinance before the fixed period ends, or on a large loan where the starting-rate savings add up.
- It is a poor fit when your budget could not absorb the payment at the lifetime cap, or when you plan to stay well past the fixed period.
- Refinancing out of an ARM later depends on rates, your equity, and your credit at that time. It is not guaranteed.
More in ARM checks before chasing a lower payment and ARM vs. fixed on new construction.
Qualifying for an ARM
A lower starting rate does not always mean you can borrow more. For ARMs with shorter fixed periods, Fannie Mae and many lenders qualify you at a rate above the starting rate, so the approval amount can come out close to a fixed-rate loan.
Questions borrowers ask
What is a 5/1 ARM?
A 5/1 ARM has a fixed rate for the first five years, then adjusts once a year. The new rate is an index plus a fixed margin, limited by the caps in your loan.
What is the difference between a 5/1 ARM and a 5/6 ARM?
Both are fixed for five years. A 5/1 ARM then adjusts once a year, while a 5/6 ARM adjusts every six months. Most newer ARMs adjust every six months.
How high can an adjustable rate go?
Caps limit the first adjustment, each later adjustment, and the lifetime increase. The Adjustable Interest Rate table on page 2 of your Loan Estimate shows the highest rate the loan can reach.
Are ARM rates lower than fixed rates?
Usually at the start, but the gap changes with the market and is sometimes small. Compare the starting rate and the fully indexed rate, which is the current index plus your margin, against fixed-rate quotes.
Can I refinance an ARM before it adjusts?
You can apply to refinance at any time, but approval and pricing depend on rates, your equity, and your credit at that time. Plan as if you might keep the loan past the fixed period.
Sources
Program rules on this page are summarized from the agencies that set them. Lenders can add stricter requirements. Checked October 7, 2026.
Related
Not sure which of these applies to you?
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