Fixed-Rate vs Adjustable-Rate Mortgage (ARM): How to Choose

The first number is the initial fixed-rate period in years. The second number is how often the rate adjusts after that. A 5/1 ARM has a fixed rate for 5 years, then adjusts once per year. A 7/6 ARM has a fixed rate for 7 years, then adjusts every 6 months. The most common ARMs are 5/1, 5/6, 7/1, 7/6, and 10/1.

ARM rate increases are limited by caps. A typical cap structure is 2/2/5 — meaning the rate can increase by no more than 2% at the first adjustment, 2% at each subsequent adjustment, and 5% total over the life of the loan. For example, if your initial rate is 5.5%, your rate can never exceed 10.5% (5.5% + 5% lifetime cap).

Yes, and many borrowers do exactly that. Refinancing before the initial fixed period ends lets you lock in a new rate (either fixed or another ARM) based on current market conditions. Just be mindful of closing costs and ensure you’ll be in the home long enough to recoup them.

For most homeowners planning to stay long-term, yes. A fixed rate provides certainty and protection against rising rates. However, if you know you’ll sell or move within the ARM’s initial fixed period (say, 5–7 years), an ARM can save you thousands in interest with virtually no risk of rate increases during that time.

Most ARMs today are tied to the Secured Overnight Financing Rate (SOFR), which replaced LIBOR. Your ARM rate equals the index (SOFR) plus a margin set by the lender (typically 2%–3%). When SOFR goes up, your rate goes up at the next adjustment date; when SOFR goes down, your rate goes down.