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Fixed vs Adjustable Rate

A fixed-rate mortgage keeps the same rate for the whole term. An adjustable-rate mortgage (ARM) starts lower, then can change on a schedule.

Fixed-rate mortgages

The rate and the principal-and-interest payment stay the same for the life of the loan. This gives predictable payments and is the most popular choice.

Adjustable-rate mortgages

An ARM offers a lower fixed rate for an intro period, such as the 7 years in a 7/6 ARM, then adjusts periodically based on an index plus a margin. Caps limit how much the rate can move at each adjustment and over the life of the loan.

Who each fits

A fixed rate fits buyers who want certainty or plan to stay long term. An ARM can fit buyers who expect to move or refinance before the fixed period ends, or who want a lower starting payment and accept the risk of later adjustments.

Reading an ARM's caps: the 2/1/5 shorthand

Every ARM carries a cap structure written as three numbers, and it defines the worst case you agreed to. A 5/6 ARM with 2/1/5 caps means the rate is fixed for five years, adjusts every six months after that, and is limited to a 2% move at the first adjustment, 1% at each later adjustment, and 5% total above the start rate over the life of the loan.

The ceiling is the number to weigh, not the start rate. If the top of the range would not work in your budget, the discount in the fixed years is a rate you are borrowing against a payment you might have to make.

Index, margin, and how the new rate is set

After the fixed period, the rate is rebuilt from two parts: an index that moves with the market, and a margin that is fixed in your note and never changes. Most current ARMs use SOFR. If the index sits at 4.3% and your margin is 2.75%, the fully indexed rate is 7.05%, then the caps are applied.

The margin is the part worth comparing between lenders, because it follows you for the entire adjustable life of the loan. Two ARMs with identical start rates and different margins are not the same loan.

When each one tends to fit

A fixed rate fits when the payment has to stay predictable, when the plan is to stay long term, or when the budget has no room for the cap ceiling. An ARM tends to fit when the fixed period comfortably covers the expected holding time, when the rate discount is meaningful rather than a rounding difference, and when the ceiling payment would still be affordable if plans change.

The plan that fails most often is intending to refinance out of an ARM before it adjusts. That works only if rates, credit, income, and property value all cooperate at the same time, and none of those are guaranteed.

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Frequently asked questions

Is a fixed or adjustable mortgage better?

Fixed gives certainty; an ARM offers a lower start with future adjustment risk. It depends on how long you will keep the loan.

What is a 7/6 ARM?

A loan fixed for 7 years, then adjustable every 6 months based on an index plus a margin, within caps.

Can an ARM payment go up a lot?

It can rise at each adjustment, but rate caps limit how much it moves per period and overall.

What do the numbers in 2/1/5 caps mean?

They limit rate movement: 2% at the first adjustment, 1% at each adjustment after that, and 5% total above your starting rate for the life of the loan. The lifetime cap tells you the highest payment you agreed to.

What is the margin on an ARM?

The margin is a fixed amount added to the index to set your new rate at each adjustment. It never changes for the life of the loan, so it is worth comparing between lenders even when start rates match.

Is it safe to plan on refinancing before my ARM adjusts?

That plan depends on rates, credit, income, and property value all cooperating at the same time. None of those are guaranteed, so the lifetime cap payment is the figure worth testing against your budget.