Most buyers default to a 30-year fixed mortgage because it's simple: one rate for three decades. But adjustable-rate mortgages—ARMs—often carry lower initial rates, which raises the question: what exactly are you committing to when you choose one?
The structure: initial period plus adjustments
A 5/6 ARM is fixed for five years, then adjusts every six months. A 7/6 ARM is fixed for seven years, then adjusts every six months. After the initial period ends, your rate moves based on an index (commonly SOFR) plus a margin set at closing. If SOFR is 4.5% and your margin is 2.25%, your new rate is 6.75%—but caps limit how much it can move.
Caps: the guardrails that matter
Every ARM has three caps. The initial adjustment cap limits the first change after the fixed period—commonly 2% or 5%. The periodic cap limits subsequent changes, typically 2% per adjustment. The lifetime cap sets the ceiling over the loan's life, often 5% above the start rate.
Example for illustration: suppose you close a 5/6 ARM at 6.0% with a 2/2/5 cap structure. At year five, your rate can't exceed 8.0% (initial cap). At each six-month adjustment after that, it can't rise more than 2% per period. Over the loan's life, it can't exceed 11.0%. If you started at 5.5%, the lifetime cap would be 10.5%. These numbers are illustrative—actual rates and products are subject to change and this is not a commitment to lend.
The first-adjustment shock
The biggest risk isn't gradual drift; it's the jump at year five or seven when the teaser rate expires. If you financed at 5.5% and rates have climbed, that first adjustment—even capped—can meaningfully increase your payment. Borrowers who haven't refinanced or sold by then feel it immediately.
Who an ARM actually fits
The Alliance take: ARMs make sense when your holding period is shorter than the fixed window. If you're certain you'll sell or refinance within five years, a 5/6 ARM saves you money every month without exposure to adjustment risk. If you plan to stay ten years or are unsure, a 30-year fixed eliminates the guesswork. ARMs are not inherently risky—they're a tool that requires honest assessment of how long you'll hold the property.
Don't choose an ARM solely because the initial rate is lower. Factor in the caps, the index, your actual timeline, and your tolerance for payment variability. If the answer isn't clear, the fixed mortgage is the safer default.
Ready to compare scenarios with real numbers? Use our mortgage calculators or start an application to see both structures side by side.