Adjustable-rate mortgage (ARM)

Key facts

• Common types are 5/6, 7/6 and 10/6: fixed for 5, 7 or 10 years, then adjusting every 6 months.
• Caps limit how much the rate can rise at each adjustment and over the life of the loan.
• The starting rate is usually lower than a 30-year fixed.
• After the fixed period, your new rate = an index + a margin. The index is a published market rate (today usually SOFR, the Secured Overnight Financing Rate). The margin is a fixed amount set in your loan documents, often around 2.75%. So if SOFR is 4% and your margin is 2.75%, your rate becomes 6.75%, subject to the caps.
• Caps are usually written like 2/1/5 (or 5/1/5): the most the rate can move at the first change, at each later change, and over the life of the loan. With a 6% start and a 5% lifetime cap, the rate can never go above 11%.
• Worst-case example: a $300,000 7/6 ARM at 6% is about $1,799 a month (principal and interest). If the rate rose to the 11% lifetime cap after year 7, the payment on the remaining balance would be roughly $2,700. Always check you could afford the worst case.
• Lenders usually qualify you at the higher of the start rate or the start rate plus 2%, so you are less likely to be stretched if rates rise.
• Many people plan to refinance before the fixed period ends. That only works if rates, your credit and your home value allow it at the time, so don't rely on it.

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