Compare an adjustable-rate mortgage against a fixed one — including what happens if the ARM adjusts upward.
ARM monthly saving
$234
During the first 5 years.
At 5.75% the ARM payment is $2,334 versus $2,568 on the 6.65% fixed — saving $234 a month, or $18,049 of interest across the 5-year fixed period. After that the rate can adjust; at 8.25% the payment would jump to $2,926.
The 8.25% above is a scenario, not a forecast — ARM rates reset based on an index plus a margin, subject to caps. If rates rise, your payment could jump to $2,926 ($591 more than today, and $358 above the fixed option). Check the loan's caps: they limit how much the rate can move at first adjustment, per adjustment, and over the life of the loan.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends — a job likely to relocate you, a starter home, or a plan to pay the loan off early. If you might still hold the mortgage after 5 years, you're taking on genuine rate risk to save $234 a month now. The fixed loan costs more upfront but removes that uncertainty entirely.
Whichever you choose, the payment includes taxes, insurance and possibly PMI. See the complete PITI figure before deciding what you can afford.
Mortgage calculatorWorked scenarios with the full analysis, so you can see how the numbers move before entering your own.
A typical comparison where the ARM offers a meaningful initial discount.
ARM monthly saving
$234
At 5.75% the ARM payment is $2,334 versus $2,568 on the 6.65% fixed — saving $234 a month, or $18,049 of interest across the 5-year fixed period. After that the rate can adjust; at 8.25% the payment would jump to $2,926.
The 8.25% above is a scenario, not a forecast — ARM rates reset based on an index plus a margin, subject to caps. If rates rise, your payment could jump to $2,926 ($591 more than today, and $358 above the fixed option). Check the loan's caps: they limit how much the rate can move at first adjustment, per adjustment, and over the life of the loan.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends — a job likely to relocate you, a starter home, or a plan to pay the loan off early. If you might still hold the mortgage after 5 years, you're taking on genuine rate risk to save $234 a month now. The fixed loan costs more upfront but removes that uncertainty entirely.
More years of rate certainty, usually at a smaller initial discount.
ARM monthly saving
$144
At 6.10% the ARM payment is $2,424 versus $2,568 on the 6.65% fixed — saving $144 a month, or $15,453 of interest across the 7-year fixed period. After that the rate can adjust; at 8% the payment would jump to $2,850.
The 8% above is a scenario, not a forecast — ARM rates reset based on an index plus a margin, subject to caps. If rates rise, your payment could jump to $2,850 ($426 more than today, and $282 above the fixed option). Check the loan's caps: they limit how much the rate can move at first adjustment, per adjustment, and over the life of the loan.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends — a job likely to relocate you, a starter home, or a plan to pay the loan off early. If you might still hold the mortgage after 7 years, you're taking on genuine rate risk to save $144 a month now. The fixed loan costs more upfront but removes that uncertainty entirely.
When the ARM barely undercuts the fixed rate, the rate risk rarely justifies it.
ARM monthly saving
$34
At 6.35% the ARM payment is $2,178 versus $2,212 on the 6.50% fixed — saving $34 a month, or $2,636 of interest across the 5-year fixed period. After that the rate can adjust; at 8% the payment would jump to $2,524.
The 8% above is a scenario, not a forecast — ARM rates reset based on an index plus a margin, subject to caps. If rates rise, your payment could jump to $2,524 ($347 more than today, and $312 above the fixed option). Check the loan's caps: they limit how much the rate can move at first adjustment, per adjustment, and over the life of the loan.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends — a job likely to relocate you, a starter home, or a plan to pay the loan off early. If you might still hold the mortgage after 5 years, you're taking on genuine rate risk to save $34 a month now. The fixed loan costs more upfront but removes that uncertainty entirely.
A scenario where the ARM adjusts downward — possible, but not something to count on.
ARM monthly saving
$234
At 5.75% the ARM payment is $2,334 versus $2,568 on the 6.65% fixed — saving $234 a month, or $18,049 of interest across the 5-year fixed period. After that the rate can adjust; at 5% the payment would jump to $2,169.
The 5% above is a scenario, not a forecast — ARM rates reset based on an index plus a margin, subject to caps. If rates rise, your payment could jump to $2,169 (-$165 more than today, and $399 below the fixed option). Check the loan's caps: they limit how much the rate can move at first adjustment, per adjustment, and over the life of the loan.
An ARM makes sense when you're confident you'll sell or refinance before the fixed period ends — a job likely to relocate you, a starter home, or a plan to pay the loan off early. If you might still hold the mortgage after 5 years, you're taking on genuine rate risk to save $234 a month now. The fixed loan costs more upfront but removes that uncertainty entirely.
An adjustable-rate mortgage has a fixed introductory rate for a set period — commonly 5, 7 or 10 years — after which the rate resets periodically based on a market index plus a fixed margin. A '5/1 ARM' means five years fixed, then annual adjustments. The initial rate is usually below a comparable 30-year fixed, which is the entire appeal.
Caps limit how far the rate can move: typically a cap on the first adjustment, a cap on each subsequent adjustment, and a lifetime cap. Those caps define your worst case, and they're the first thing to check on any ARM offer — the difference between a 2% and 5% lifetime cap is the difference between a manageable and an unaffordable payment.
An ARM is defensible when you have a genuine reason to expect the loan won't outlast the fixed period: a career that relocates you every few years, a starter home you'll outgrow, or a concrete plan to pay it off. In those cases you capture the lower rate and never face the reset. It can also make sense when the discount is large and you could comfortably absorb the worst-case capped payment.
The failure mode is predictable: taking an ARM because it's the only way the payment fits today, then still holding the loan when it resets. If the fixed payment is unaffordable but the ARM payment works, that's a signal the house is too expensive rather than a reason to choose the ARM. Nobody can forecast rates years out, so the honest test is whether you could handle the capped worst case.
If only the ARM payment fits, the house is too expensive. The reset could leave you with an unaffordable payment.
Caps define your worst case. A 5-point lifetime cap on a 5.75% loan means a possible 10.75% rate — check before signing.
Refinancing depends on future rates, your credit and home value. It's a plan, not a guarantee.
If the ARM barely undercuts the fixed rate, you're accepting real rate risk for very little benefit.
At reset, the remaining balance is re-amortized over the remaining term at the new rate, which can jump the payment sharply.
It depends on how long you'll keep the loan. An ARM's lower intro rate saves money during the fixed period, which is valuable if you'll sell or refinance before it resets. If you'll still hold the mortgage after the intro period, you're taking on rate risk. A fixed loan costs more upfront but removes the uncertainty entirely.
The rate is fixed for the first 5 years, then adjusts once per year afterward based on a market index plus a margin. Similar products include 7/1 and 10/1 ARMs with longer fixed periods. Some modern ARMs adjust every six months after the fixed period, shown as 5/6 rather than 5/1.
It's limited by caps written into the loan: a cap on the first adjustment, a cap on each later adjustment, and a lifetime cap. A common structure is 2/2/5 — up to 2 points at first adjustment, 2 points per adjustment after, and 5 points over the life of the loan. Always check the caps, since they define your worst case.
No — that's the classic mistake. If the fixed payment is unaffordable but the ARM payment works, the house is likely too expensive rather than the ARM being the right product. When the rate resets you could face a payment you can't manage. Use an ARM only when you have a real reason to expect a short holding period.
Usually yes, and many ARM borrowers plan to. But refinancing depends on conditions at that time — your credit, your home's value, and prevailing rates. If rates have risen sharply or your home has lost value, refinancing may be expensive or unavailable. Treat it as a plan, not a guarantee.
The next calculations that usually follow this one.
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