Fixed-Rate vs. Adjustable-Rate Mortgage (ARM): How to Choose
A fixed-rate mortgage keeps the same interest rate and principal-and-interest payment for the whole loan. An adjustable-rate mortgage (ARM) often starts with a lower rate, but after the first few years its rate and payment can rise, so choose one only if you could afford its worst-case payment.
Key takeaways
- A fixed rate often starts higher than an ARM's, but your principal-and-interest payment never changes.
- An ARM's rate is fixed for an initial period, often 5, 7 or 10 years. Then it follows a market index, within limits called caps.
- In our example, a $320,000 5/6 ARM at 5.75% costs $155.19 a month less than a 6.5% fixed loan for five years. In the worst case, its payment later reaches $2,841.35, which is $818.73 more than the fixed payment.
- Even then, the ARM costs less in interest if you sell or refinance within 6 years 8 months. Keep it longer and it can cost far more.
- Don't count on refinancing before the rate changes. Test your own offers with our ARM stress test.
How a fixed-rate mortgage works
With a fixed-rate mortgage, the interest rate is set when you take out the loan and never changes. Your principal-and-interest payment stays the same for the life of the loan, so you know your total interest from day one. Common terms are 30 and 15 years, which our 15-year vs. 30-year guide compares.
For example, a $320,000 loan at 6.5% for 30 years costs $2,022.62 a month in principal and interest, and $408,142 in total interest. Property taxes and homeowners insurance, often collected with your payment, can still change. And if rates fall, you'd generally need to refinance, with new closing costs, to get the lower rate.
How an adjustable-rate mortgage works
An ARM's interest rate is fixed for an initial period, then adjusts on a set schedule. Each time the rate changes, your payment is recalculated so the remaining balance is still paid off by the end of the term, such as 30 years (see how amortization works).
What "5/6" means
The first number is how many years the starting rate lasts. The second is how often the rate can change after that. A 5/6 ARM keeps its starting rate for five years, then can adjust every six months. A 7/6 ARM is fixed for seven years and a 10/6 ARM for ten. A 5/1 ARM adjusts once a year after its first five years.
Index and margin
After the initial period, your rate is reset with a formula:
New rate = index + margin, limited by the caps
- The index is a market rate that rises and falls. Many new ARMs, including the ones Fannie Mae and Freddie Mac buy, use the 30-day average SOFR (Secured Overnight Financing Rate), published by the Federal Reserve Bank of New York. SOFR replaced LIBOR, which was phased out in 2023. Some ARMs use another index, such as the 1-year Treasury (CMT) rate.
- The margin is a fixed number of percentage points the lender adds. It's set in your loan agreement, doesn't change after closing, and differs between lenders.
Index plus margin is the fully indexed rate. For example, a 4.00% index plus a 2.75% margin is 6.75%. If your starting rate is below the fully indexed rate, your rate can rise at the first adjustment even if the index never moves. The rate generally can't fall below the margin.
Rate caps
- First adjustment cap: how much the rate can change the first time it adjusts. Two or five percentage points are common.
- Later adjustment cap: the limit at each change after that, most often one or two points.
- Lifetime cap: how far the rate can ever rise above its start, most often five points.
Caps are written in that order. On the standard SOFR ARMs that Fannie Mae and Freddie Mac buy, they're at most 2/1/5 for 5/6 ARMs and 5/1/5 for 7/6 and 10/6 ARMs. So a 5/6 ARM that starts at 5.75% can rise to 7.75% at its first adjustment, then one point every six months, up to 10.75%.
Where to find these terms
Within three business days of your application, each lender must give you a Loan Estimate. For an ARM, the Adjustable Interest Rate (AIR) table on page 2 lists the index, the margin, the minimum and maximum rates, when the rate can change and the limit on each change. Page 1 shows how high your rate and principal-and-interest payment can go, and in which year.
Example: a $320,000 ARM in the worst case
Say you're borrowing $320,000 for 30 years and have two offers: 6.5% fixed, or a 5/6 ARM that starts at 5.75% with 2/1/5 caps. These are example rates, not current offers. The ARM's payment starts at $1,867.43, $155.19 less than the fixed $2,022.62. Here's the worst case, with the rate rising as fast as the caps allow:
| Months | ARM rate | ARM payment | Vs. fixed ($2,022.62) |
|---|---|---|---|
| 1–60 | 5.75% | $1,867.43 | $155.19 less |
| 61–66 | 7.75% | $2,242.11 | $219.49 more |
| 67–72 | 8.75% | $2,438.00 | $415.38 more |
| 73–78 | 9.75% | $2,637.94 | $615.32 more |
| 79–360 | 10.75% | $2,841.35 | $818.73 more |
At the first adjustment, the payment jumps $374.68, about 20%. From month 79 on, it's $973.92 above where it started, about 52% more. A jump like this is called payment shock.
The worst case isn't a forecast: rates could also stay flat or fall. But even a milder rise can cost more than the fixed loan. If the index plus margin came to 6.75% at the first adjustment and stayed there, the payment would be $2,050.89 from month 61, above the fixed payment.
Which costs less over time?
Interest is what borrowing costs you; the principal you repay becomes home equity. Here's the total interest in our example, by how long you keep the loan:
| Keep the loan for | Fixed at 6.5% | ARM, rate never rises | ARM, worst case |
|---|---|---|---|
| 5 years | $100,912 | $88,885 | $88,885 |
| 7 years | $139,232 | $122,412 | $143,119 |
| 10 years | $193,998 | $170,076 | $235,164 |
| 30 years | $408,142 | $352,276 | $637,215 |
In the first five years, the ARM saves $12,027 in interest whatever rates do. That's more than its $9,311 in lower payments, because more of each ARM payment goes to principal.
Even in the worst case, the ARM costs less in interest if you sell or refinance within 6 years 8 months. After that the gap grows fast: $41,166 more than the fixed loan by year 10, and $229,073 more over 30 years. A longer initial period buys time. With the same 5.75% start and 5/1/5 caps, a 7/6 ARM stays cheaper in the worst case for 8 years 4 months, and a 10/6 ARM for 12 years 2 months. These totals leave out closing costs, points and the cost of refinancing.
ARM stress test: try your own numbers
Enter the two offers you're comparing. The stress test shows how high the ARM's payment could go and how long it stays cheaper if its rate rises as fast as the caps allow. Your Loan Estimate's AIR table lists the caps.
The stress test assumes a 30-year loan with interest charged monthly. In the worst case, the ARM's rate rises by the most its caps allow at every change, up to the lifetime cap, and the payment is recalculated each time. Payments are principal and interest only: taxes, insurance, PMI, points and closing costs aren't included. See our terms of use.
When an ARM can make sense
An ARM can be a reasonable choice when most of these are true:
- You'll likely sell or pay off the loan before the rate can rise much, for example because you expect to move for work.
- You could afford the maximum payment on today's income, not on a raise you hope for.
- The rate discount is big enough to be worth the risk.
- You have savings to cover a higher payment for a while.
A fixed rate is usually the better fit if you'll stay a long time, want a predictable budget, or would struggle with the worst-case payment. Our home affordability calculator can help you check.
The risks of an ARM
- Payment shock. In our example, the worst-case payment rises 20% at the first adjustment and 52% by month 79. A 7/6 ARM with a five-point first cap could jump from $1,867.43 to $2,796.60 in one step.
- Refinancing isn't guaranteed. You might not qualify if your home's value falls, your credit score drops or your income takes a hit. Rates may also be higher when you need to refinance.
- Points may not last. On an ARM, discount points often lower the rate only during the initial period.
- Some ARMs add risk, such as interest-only periods or payment options that let your balance grow (negative amortization).
If you can't keep up with higher payments, you could lose your home to foreclosure.
Questions to ask your lender
- What's the index, where is it published, and what's my margin?
- How long does the starting rate last, and how often can it change after that?
- What are the caps on the first change, later changes and the life of the loan? Is there a floor?
- What's the fully indexed rate today, and is my starting rate below it?
- What's the highest my rate and payment could go, and when?
- Do discount points lower the rate for the whole loan or only the initial period?
- Can I convert to a fixed rate later, and at what cost?
- Is there a prepayment penalty? Federal rules generally don't allow one on an ARM, but check page 1 of your Loan Estimate.
Ask for a fixed-rate quote too, and get Loan Estimates from more than one lender to compare.
Frequently asked questions
Can an ARM's rate go down?
Yes. If the index falls, your rate and payment can drop at the next adjustment. Caps usually limit how fast the rate can fall, too, and it generally can't go below the margin.
Can I refinance an ARM into a fixed-rate loan?
Usually, if you qualify at the time. You'd pay closing costs, and your new rate would depend on the market and your finances then. Your servicer must tell you about the first rate change about 7 to 8 months before the first new payment is due, which gives you time to shop. Our refinance calculator shows whether it would pay off.
Is it easier to qualify for an ARM?
Not always. For ARMs with an initial period of five years or less, Fannie Mae's rules qualify you at a higher rate than the starting one: for a 5/6 ARM, at least the starting rate plus 2 percentage points. For 7- and 10-year ARMs, lenders can generally use the starting rate, so check for yourself that you could handle the payment after it adjusts.
Does paying extra principal help on an ARM?
Yes. Extra payments lower your balance, and at the next adjustment your payment is recalculated on the smaller balance, though a rate increase can offset that. Our mortgage payoff calculator shows what extra payments save.
This guide is general education, not financial advice. Our example rates are for illustration, not current offers, and loan terms vary by lender. For help with your decision, consider a HUD-approved housing counselor, often available at little or no cost, or a qualified financial professional. See our terms of use.
Last reviewed: October 2026