Quick answer: An adjustable-rate mortgage (ARM) starts with a fixed rate for a set period - commonly 5, 7, or 10 years - and then adjusts on a schedule for the rest of the term. A "5/6 ARM" is fixed for 5 years, then adjusts every 6 months, following an index (usually SOFR) plus a fixed margin, with caps limiting each move. ARMs can price below a 30-year fixed during the intro period; the tradeoff is payment uncertainty after it ends.
Key takeaways
- The name tells you the shape: 5/6, 7/6, 10/6 = years fixed / months between later adjustments.
- Three caps protect you: the first adjustment, each later adjustment, and a lifetime ceiling.
- Your rate after the fixed period is index (SOFR) + margin, capped - not a lender whim.
- An ARM is a fit when your realistic time-in-loan is shorter than the fixed window.
How does an ARM actually work?
Two numbers in your note control everything. The index is a public benchmark - most new ARMs use SOFR - that moves with the market. The margin is a fixed amount added on top, set at closing and unchanged for the life of the loan. When your adjustment date arrives, the new rate is index plus margin, then your caps are applied. Nothing about the adjustment is discretionary. The product itself only dates to 1981, when the savings-and-loan rate squeeze produced it — the story of how mortgages got their modern shape covers that turn.
What do the rate caps mean?
ARM caps come as three limits, often written like 2/1/5: the first adjustment cannot move the rate more than 2 percentage points, each later adjustment no more than 1, and the rate can never exceed 5 points above where it started. Before choosing any ARM, price the payment at the lifetime cap - if that payment would break your budget, the intro savings are not worth it. That stress-test habit is the single best protection an ARM borrower has.
| 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 |
| Typical intro pricing | Often lowest | Between | Highest of the three |
| Best-fit borrower | Short expected hold | Medium hold, wants a buffer | Long-term keeper |
When does an ARM make sense - and when doesn't it?
The honest test is your realistic time horizon. Buyers who expect to sell or restructure within the fixed window - a work relocation, a growing family, a planned move-up - can pocket the intro savings without ever meeting an adjustment. Buyers keeping the home indefinitely are betting on future rates, and that bet can lose. If you want lower early payments on a loan you will keep, compare a temporary buydown on a fixed rate instead - different tool, permanent certainty.
Example borrower scenario
A buyer expecting a job relocation in roughly six years compares a 7/6 ARM against a 30-year fixed on a conventional loan. The 7-year fixed window covers the whole expected stay with a one-year buffer, so the adjustment risk may never materialize. The same structure would be a poor fit for a buyer settling in for twenty years. Illustrative only.
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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. Likely to move or refinance within the fixed window, an ARM can price attractively; keeping the home long-term, a fixed rate removes the adjustment risk entirely.
Can I refinance out of an ARM later?
Usually, if you qualify at that time - but refinancing depends on future rates, equity, and your finances, so never count on it as a guaranteed exit.
Sources
Facts last verified July 24, 2026 against CFPB publications.
