Adjustable-Rate Mortgages Explained: 5/1, 7/1 and 10/1

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What the numbers mean

An adjustable-rate mortgage (ARM) has a fixed rate for a set number of years, then changes regularly. The name tells you both parts:

• 5/1 ARM — fixed for 5 years, then adjusts once a year.
• 7/1 ARM — fixed for 7 years, then yearly.
• 10/1 ARM — fixed for 10 years, then yearly.
• 5/6 ARM — fixed for 5 years, then adjusts every 6 months. Common on newer loans tied to SOFR.

How the new rate is set

The index is a market rate, today usually SOFR. The margin is a fixed add-on in your contract, often around 2.75%. The caps limit how much the rate can move. A common cap set is written 2/1/5: up to 2 points at the first change, 1 point at each later change, and 5 points over the life of the loan.

How to calculate an ARM payment after it resets

For comparison, a 30-year fixed loan at 6.5% costs $1,896 every month. The ARM saves about $145 a month for five years — around $8,700 — and then the risk begins.

Worst case: what happens at the caps

The table above jumps straight to each new rate. Caps slow the climb down. With a common 2/1/5 cap, the same 5/1 loan can rise by at most 2 points at the first reset, then 1 point a year, up to 5 points in total:

That is a rise of about $898 a month by year nine. It may never happen — but if that payment would break your budget, the ARM is the wrong loan for you.

ARM vs fixed: the break-even point

Suppose the 5/1 ARM resets to 7.75% in year six and stays there. To compare fairly, add up what you have paid and what you still owe, against a 30-year fixed loan at 6.5%:

In this example the two loans cross at about 8 years 5 months. Sell or refinance before then, and the ARM won. Stay longer at that rate, and the fixed loan wins. A smaller reset pushes the break-even later; a bigger one pulls it earlier.

5/1 vs 7/1 vs 10/1 compared

A longer fixed period usually carries a slightly higher starting rate. The rates below are illustrative — your own quotes will differ — but the pattern is typical. Each is compared with a 30-year fixed loan at 6.5% on $300,000:

The 5/1 saves the most per month, but only for five years. The 10/1 saves less, yet gives you a decade of certainty. Match the fixed period to how long you really expect to keep the loan, then add a margin of a couple of years.

When an ARM can make sense

• You expect to sell or move before the fixed period ends.
• You expect your income to rise enough to absorb a higher payment.
• The gap between ARM and fixed rates is large.

When to avoid one

• You could not afford the payment at the lifetime cap.
• You plan to stay for decades and want certainty.
• You are counting on refinancing later — rates may not cooperate.

Stress-test before you sign

Ask the lender for the margin, the caps and the worst-case payment. Then open the ARM options in the mortgage calculator, set the fixed period, and try the rate at the first cap and at the lifetime cap. If the worst case breaks your budget, choose a fixed rate.

ARM terms you will see on the paperwork

• Index — the market rate your loan follows, usually SOFR on newer loans.
• Margin — a fixed number added to the index. It never changes for the life of the loan.
• Initial cap — the most the rate can move at the first reset.
• Periodic cap — the most it can move at each later reset.
• Lifetime cap — the most it can ever rise above the starting rate.
• Floor — the lowest the rate can fall, often the margin or the starting rate.
• Conversion option — on some loans, the right to switch to a fixed rate for a fee.

Ask the lender to show the worst-case payment in writing. Lenders must give you a Loan Estimate that shows how high the payment can go.

Frequently asked questions