By the CalcLedger editorial team · Updated September 2026 · Examples use illustrative rates · How we calculate
A fixed-rate mortgage keeps the same interest rate, and the same principal-and-interest payment, for the entire loan. An adjustable-rate mortgage (ARM) starts with a fixed rate for a set number of years, usually lower than a 30-year fixed rate, and then adjusts periodically based on market rates. The right choice depends on how long you'll keep the loan and how much payment risk you can handle.
How ARMs work
ARMs are named by two numbers. A 7/6 ARM has a fixed rate for the first 7 years, then adjusts every 6 months. A 5/6 ARM is fixed for 5 years, and a 10/6 ARM for 10. After the fixed period, your rate is set by a formula:
- Index: a market rate that moves over time. Most new ARMs use SOFR (the Secured Overnight Financing Rate).
- Margin: a fixed number of percentage points set in your loan agreement, often around 2.75.
- Caps: limits on how much the rate can change. A common structure is 5/1/5: up to 5 points at the first adjustment, 1 point at each later adjustment, and 5 points maximum over the life of the loan.
Your Loan Estimate lists the index, margin, caps, and the highest possible payment. Read that section carefully.
Worked example: $400,000 loan
Using illustrative rates: 6.5% for a 30-year fixed, and 5.75% for a 7/6 ARM.
| 30-year fixed at 6.5% | 7/6 ARM at 5.75% | |
|---|---|---|
| Monthly P&I, years 1–7 | $2,528 | $2,334 |
| Savings over 7 years | — | ≈ $16,300 |
| Balance after 7 years | $361,665 | $356,934 |
The ARM saves about $194 a month for seven years, and because more of each payment goes to principal at a lower rate, you also owe about $4,700 less when the fixed period ends. Total advantage by year 7: roughly $21,000.
What happens when it adjusts
After year 7, the payment is recalculated on the remaining $356,934 over 23 years at the new rate:
| Rate after adjustment | New monthly P&I | Change vs. starting ARM payment |
|---|---|---|
| 5.75% (unchanged) | $2,334 | $0 |
| 6.75% | $2,550 | +$216 |
| 7.75% | $2,775 | +$441 |
| 8.75% | $3,008 | +$674 |
| 10.75% (maximum with 5/1/5 caps) | $3,496 | +$1,162 |
In the worst case, the payment rises by more than $1,100 a month. That's the risk you accept in exchange for the early savings. Before choosing an ARM, ask yourself: could I afford the maximum payment? If the answer is no, you're relying on being able to sell or refinance in time.
Monthly payment on a $400,000 loan: fixed vs. ARM after year 7
Principal and interest; ARM rate after adjustment shown in each label
When an ARM can make sense
- You expect to move before the fixed period ends. If you'll sell in five or six years, a 7/6 ARM gives you a lower rate for the whole time you own the home.
- You expect your income to rise significantly, for example a medical resident or someone early in a high-earning career, and could handle a higher payment later.
- The rate gap is large. The bigger the difference between ARM and fixed rates, the more the ARM saves during the fixed period.
- You plan to pay the loan down aggressively, so the balance will be much smaller by the time it adjusts.
When a fixed rate is the better choice
- You plan to stay long-term, especially past the fixed period.
- Your budget is tight. If a payment increase of a few hundred dollars would be a problem, the certainty of a fixed rate is worth paying for.
- You're counting on refinancing later. Refinancing depends on future rates, your credit, your income, and your home's value, none of which are guaranteed. Our refinance guide explains the costs involved.
Common ARM misconceptions
"I'll just refinance before it adjusts." Many borrowers do. But if rates are higher then, or your home has lost value, or your income has dropped, refinancing may not be possible or worthwhile. Plan as if you'll keep the ARM.
"The rate can only go up." Not true. If market rates fall, your rate can adjust down, though usually not below a floor set in the loan, often the margin.
"ARMs caused the 2008 crisis, so they're dangerous." Many risky loans of that era had features that are now largely gone, such as teaser rates that reset within two years and no verification of income. Today's ARMs require the lender to check that you can afford the payment and have clear caps. They still carry real payment risk, but they're a very different product.
A quick decision checklist
- How many years do you realistically expect to keep this loan?
- Is that comfortably shorter than the ARM's fixed period?
- Could your budget handle the maximum payment shown on the Loan Estimate?
- Is the rate difference big enough to be worth the risk?
If you answer yes to all four, an ARM is worth considering. Otherwise, a fixed rate is the safer choice. Compare payments at different rates with the mortgage calculator, and check how the rate changes your budget with the home affordability calculator.