Quick answer (October 2026): An adjustable-rate mortgage (ARM) has a fixed rate for the first few years, commonly 5, 7 or 10. After that, the rate changes on a set schedule for the rest of the loan. A "5/6 ARM" is fixed for 5 years, then can change every 6 months. Each new rate is an index (a public market rate, usually SOFR) plus a margin (a fixed add-on in your loan papers). Caps limit each change. The CFPB says the lifetime cap is most commonly 5%, meaning 5 percentage points above the start rate. An ARM can start below a 30-year fixed rate, though not always. The tradeoff is that your payment can rise once the fixed years end.
Key takeaways
- The name tells you the shape. In a 5/6, 7/6 or 10/6 ARM, the first number is the fixed years and the second is the months between later changes.
- Three caps protect you: one for the first change, one for each later change, and a lifetime ceiling.
- Your rate after the fixed period is index plus margin, held in by the caps. It is set by a formula, not by the lender's mood.
- An ARM tends to fit when you expect to sell or refinance before the fixed period ends. Even then, check that the highest possible payment would fit your budget.
Comparing an ARM with a fixed rate?
Tell us your price range and how long you plan to stay. A Valley West loan officer can walk through how an ARM and a fixed-rate loan would compare for your situation, including the highest payment an ARM could reach. It is not a loan decision or a commitment to lend. No obligation to apply.
Request an ARM reviewHow does an ARM actually work?
Two numbers in your note control everything. Your note is the loan contract you sign at closing.
The index is a public benchmark rate that moves with the market. Most new ARMs use SOFR, the Secured Overnight Financing Rate. The lender picks the index when you apply, and that choice generally does not change after closing.
The margin is a fixed number of percentage points added on top of the index. It is set in your loan papers and does not change for the life of the loan. The CFPB notes that margins can vary a lot between lenders, and that you can negotiate the margin much like a rate.
When your change date arrives, the new rate is index plus margin. The CFPB calls that sum the fully indexed rate. Your caps are applied next. If the formula asks for a bigger jump than a cap allows, the cap wins. Nothing about the change is up to the lender's judgment that day.
Here is the math with made-up numbers. Say the index is 4% and your margin is 2.75%. The fully indexed rate is 6.75%. If your current rate is 4.5% and your first-change cap is 2 points, the new rate stops at 6.5%. These figures are hypothetical, chosen only to show the math. They are not a rate offer, and a rate is not an APR.
Adjustable-rate loans spread across the U.S. after federal regulators widened the rules for them in 1981, during a rate squeeze on savings and loan banks. The story of how mortgages got their modern shape covers that turn.
What do 5/6, 7/6 and 10/6 mean?
The first number is how many years the rate stays fixed. The second number is how often the rate can change after that. In a 5/6 ARM, the second number means months: the rate can change every 6 months.
Older loans were often written as 5/1 or 7/1. There, the "1" means one year, so the rate changes once a year after the fixed period. Read the loan papers rather than guessing, because the second number can mean months on one loan and years on another.
- 5/6 ARM: fixed for 5 years, then can change every 6 months.
- 7/6 ARM: fixed for 7 years, then can change every 6 months.
- 10/6 ARM: fixed for 10 years, then can change every 6 months.
- 5/1 ARM: fixed for 5 years, then can change once a year.
These loans often run 30 years in total. Only the first few years are fixed. After that, the rate keeps resetting on schedule until the loan is paid off or refinanced.
What do the rate caps mean?
ARM caps come as three limits, often written like 2/1/5. The first change cannot move the rate more than 2 percentage points. Each later change can move it no more than 1 point. Over the life of the loan, the rate can never be more than 5 points above where it started.
A percentage point is a plain step in the rate. A rate that moves from 6% to 8% has gone up 2 percentage points.
The CFPB says the first-change cap is commonly 2 or 5 points, the later-change cap is most commonly 1 or 2 points, and the lifetime cap is most commonly 5 points. Some loans have a higher lifetime cap. Caps limit how far the rate can fall, too. Many loans also set a floor, the lowest rate the loan can ever reach.
Before choosing any ARM, price the payment at the lifetime cap. If that payment would break your budget, the early savings may not be worth it. That stress test is one of the most useful checks an ARM borrower can run.
"Ask the lender to calculate the highest payment you may ever have to pay on the loan you are considering."
| When | Most the rate can be above the start rate | Which cap applies |
|---|---|---|
| Years 1 to 5 | 0 points (fixed) | Fixed period |
| First change, start of year 6 | 2 points | First-change cap of 2 |
| 6 months later | 3 points | Later-change cap of 1 |
| 12 months after the first change | 4 points | Later-change cap of 1 |
| 18 months after the first change | 5 points | Lifetime cap of 5, the ceiling |
| Every change after that | Still 5 points at most | Lifetime cap holds |
This table shows the worst case, where the index rises enough to hit every cap. If the index stays flat or falls, the rate may rise less, stay the same, or go down. On a loan with a first-change cap of 5 points, such as 5/1/5, the rate could reach the lifetime ceiling at the very first change.
| 5/6 ARM | 7/6 ARM | 30-year fixed | |
|---|---|---|---|
| Rate certainty | 5 years | 7 years | Entire term |
| Adjusts | Every 6 months after year 5 | Every 6 months after year 7 | Never |
| How the start rate compares | Can start below a fixed rate, not always | Between | Can start above an ARM's start rate, not always |
| Often suits | Short expected hold | Medium hold, wants a buffer | Long-term keeper |
How high could my ARM payment go?
Use the stress test below. Type the loan amount, the start rate and the three caps from the loan you are looking at. It raises the rate as fast as the caps allow and shows the highest principal and interest payment that path would reach. Principal and interest (P&I) is the part of the payment that pays down the loan and covers its interest. Taxes and insurance come on top.
ARM payment stress test
Type the numbers from the ARM you are looking at. The tool raises the rate as fast as your caps allow and shows the highest principal and interest payment that path reaches.
This is Valley West Mortgage's own tool. It does the math in your browser and does not send your figures to us unless you submit the form further down. It uses only the numbers you type. It assumes a fully amortizing loan and an index that rises enough to hit every cap. It shows principal and interest only. Taxes, homeowners insurance and any mortgage insurance are extra. A rate is not an APR, and the APR on a loan is usually higher. Real loans can also have a floor and their own rounding rules, so the maximum payment on page 1 of your Loan Estimate (Loan Terms, Monthly Principal & Interest) is the figure to trust. This is not a quote, an offer of credit, a loan decision or a commitment to lend.
If the highest payment would not fit your budget, look at a longer fixed period, a fixed-rate loan, or a smaller loan. Our guide to debt-to-income ratio shows how lenders weigh a payment against your income. Our home affordability guide helps you set a payment you can live with.
When does an ARM make sense, and when doesn't it?
The honest test is your realistic time horizon. Some buyers expect to sell or refinance within the fixed period. Think of a planned work move, a need for more space, or a move-up home. Those buyers can keep the early savings without ever meeting a rate change.
Buyers keeping the home for many years are betting on future rates, and that bet can lose. The CFPB warns not to assume you will be able to sell or refinance before the rate changes. Home values can drop, and your finances can change.
If you want lower early payments on a loan you will keep, compare a temporary buydown on a fixed rate instead. It is a different tool, and the rate after the buydown stays fixed.
Example borrower scenario
A buyer expecting a job move in about six years compares a 7/6 ARM with a 30-year fixed on a conventional loan. The 7-year fixed period covers the whole expected stay with a one-year buffer, so a rate change may never come. The same loan would be a poor fit for a buyer settling in for twenty years. Illustrative only.
Not sure your time horizon fits an ARM?
A Las Vegas loan officer can walk through how an ARM and a fixed-rate loan would compare for your situation, including the capped worst case, so you choose with the whole picture. Not a commitment to lend. No obligation.
Request an ARM reviewHow do I read an ARM on my Loan Estimate?
A Loan Estimate is the three-page form a lender must give you within three business days after you apply. For an ARM, page 2 carries an extra table, the Adjustable Interest Rate (AIR) table. Federal rules (Regulation Z, 12 CFR 1026.37) set what it must show, so every lender's version reads the same way.
| Line on the form | What it tells you |
|---|---|
| Index + Margin | The index your rate follows (for example SOFR) and the margin added to it |
| Initial Interest Rate | The rate you start with at closing |
| Minimum/Maximum Interest Rate | The lowest and highest the rate can ever be after the start period |
| Change Frequency: First Change | When the rate can first change |
| Change Frequency: Subsequent Changes | How often it can change after that |
| Limits on Interest Rate Changes | Your first-change cap and your later-change cap |
Page 1 shows the payment side. In the Loan Terms table, the Monthly Principal & Interest row answers "Can this amount increase after closing?" For an ARM, it says how often the payment can change, when it first changes, and how high it can go and in which year. The Projected Payments table shows the payment ranges for later years. That highest payment is the number the CFPB tells you to ask for. A separate Adjustable Payment (AP) table appears only when the payment can change for reasons other than the rate, such as an interest-only period.
With an ARM application, lenders also give you the CFPB's Consumer Handbook on Adjustable Rate Mortgages, or a booklet like it. It is short and worth reading before you lock. Our guide to a mortgage rate lock explains what locking does and does not freeze.
What should I compare between an ARM and a fixed rate?
Compare more than the starting rate. The CFPB lists the questions to answer before you take out an ARM. In plain terms:
- How high or low can the rate and payment go with each change?
- How often will the rate change, and how soon could the payment go up?
- Is there a cap on how high the rate can go, and a floor on how low?
- Could you still afford the loan if the rate and payment rose to the maximum the contract allows?
Two lenders can offer the same start rate with different caps or margins. Line up the AIR tables side by side, not just the first page. Then compare the APR on each Loan Estimate. The APR (annual percentage rate) folds many loan costs into one yearly figure, so it is usually higher than the rate. Getting preapproved early gives you real Loan Estimates to compare instead of guesses.
If you already have an ARM and your fixed period is ending, a refinance into a fixed rate is one option, if you qualify at that time.
ARM FAQ
What is a 5/6 ARM?
An adjustable-rate mortgage with a fixed rate for the first 5 years, then a rate that can adjust every 6 months for the rest of the term, subject to caps.
Can my ARM payment go up?
Yes. After the fixed period your rate follows an index plus a set margin, limited by your caps. Budget for the capped worst case, not the starting payment.
What index do ARMs use now?
Most new U.S. ARMs adjust based on SOFR, the Secured Overnight Financing Rate, plus a fixed margin written into your note.
How do I choose between an ARM and a fixed rate?
Match the fixed period to how long you realistically expect to keep the loan. If you are likely to move or refinance within the fixed period, an ARM can price well. If you are keeping the home long term, a fixed rate removes the risk of rate changes.
Can I refinance out of an ARM later?
Usually, if you qualify at that time. Refinancing depends on future rates, equity, and your finances, so never count on it as a guaranteed exit.
What is the difference between a 5/1 ARM and a 5/6 ARM?
Both are fixed for the first 5 years. After that, a 5/1 ARM can change once a year and a 5/6 ARM can change every 6 months. Check your loan papers, since the second number can mean months or years.
Can my ARM rate go down?
It can, if the index falls. Caps can limit how far the rate drops, and many loans set a floor, a lowest rate the loan can reach. The CFPB notes that a lower index does not lower the payment on every ARM.
What is the highest payment I could ever owe on an ARM?
It is on page 1 of your Loan Estimate, in the Loan Terms table. The Monthly Principal & Interest row shows how high the payment can go and the year it can first get there. You can also ask the lender to calculate it. The stress test on this page shows the same idea using your own numbers.
Want to walk through the highest payment on your own loan?
A Valley West loan officer can explain the AIR table and the payment limits on page 1 of a Loan Estimate, line by line. A Loan Estimate is issued after you apply. This is not a commitment to lend. No obligation to apply.
Start my ARM reviewTalk to a Valley West specialist
Sources
- CFPB, What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
- CFPB, What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?
- CFPB, For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?
- CFPB, Consumer Handbook on Adjustable Rate Mortgages (PDF)
- CFPB, Regulation Z, 12 CFR 1026.37: content of the Loan Estimate (Loan Terms and AIR table)
- CFPB, What is a Loan Estimate?
Updated October 23, 2026: added an ARM payment stress test, a worst-case cap table, a guide to the ARM tables on your Loan Estimate, three new FAQs, a contact form and call links, and replaced a CFPB link that no longer works. Facts last verified October 23, 2026 against CFPB publications and Regulation Z.
