ARM vs. fixed-rate mortgage
Scenario. A $500,000 loan. The 30-year fixed is 6.76%; the 7/6 ARM starts at 6.01% for seven years, then adjusts every six months within its caps.
| 30-year fixed | 7/6 ARM | |
|---|---|---|
| Payment, years 1–7 | $3,246 | $3,001 |
| Saved over the 7 fixed years | — | $20,609 |
| Payment after adjusting (worst case, +5%) | $3,246 | $4,765 |
| Rate certainty | Full, for 30 years | 7 years, then capped variability |
Run “30-year fixed” → · Run “7/6 ARM” →
The bet you are making
An ARM gives you a lower rate for a fixed window — commonly 5, 7, or 10 years — in exchange for taking on rate risk afterward. If you sell or refinance before the fixed period ends, you bank the savings and never face an adjustment. If you are still holding when it adjusts, your payment moves with the market, within per-adjustment and lifetime caps.
When the ARM wins
- You have a concrete reason to expect a move or payoff before the fixed period ends — job relocation, a starter home, a known windfall.
- Fixed rates are elevated and widely expected to fall, so a future refinance is likely anyway.
- You can comfortably afford the payment at the fully-adjusted worst-case rate, not just the intro rate.
Frequently asked questions
Is an ARM a good idea right now?
It can be if you are confident you will move or refinance before the fixed period ends and you could still afford the payment if it adjusted to its cap. For a long-term hold with no exit plan, a fixed rate is safer.
How high can an ARM payment go?
Not in one jump — per-adjustment caps (often 2%) limit each step. But a lifetime cap of 5% above the start rate can raise the payment substantially over several adjustments. Always check the maximum before choosing an ARM.
Can I refinance an ARM to a fixed rate later?
Yes, and many borrowers do before the fixed period ends. The risk is that rates or your finances have moved against you by then, so the fixed-rate escape hatch is not guaranteed.
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Terms: Adjustable-rate mortgage (ARM) , Fixed-rate mortgage , Rate cap , Index rate , Margin