Fixed-Rate vs Adjustable-Rate Mortgage

An ARM offers a lower rate for the first 5 or 7 years. After that, your rate adjusts to whatever the market is — which can be lower, higher, or much higher. See what each path costs in your scenario.

Loan + rate scenarios

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Typical 5/1 or 7/1 ARM, 1.0% below fixed.
5/1 → 5 years. 7/1 → 7 years.
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Your guess at the rate when the ARM resets.

30-year fixed

Monthly payment

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Total interest

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Total paid

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Payment never changes

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ARM

Payment (intro period)

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Payment after adjustment

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Total interest

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Total paid

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How ARMs work

An ARM (Adjustable-Rate Mortgage) gives you a fixed introductory rate for 5, 7, or 10 years, then adjusts annually based on a market index (typically SOFR). The "5/1" notation means: 5 years fixed, then 1-year adjustments thereafter. There's usually a cap on how much the rate can move per adjustment (often 2%) and a lifetime cap (often 5% above the start rate).

When an ARM is the right call

  • You'll sell or refinance before the adjustment. You captured the rate discount, paid less, and exited before the risk hit. Common for people in 5–7 year career-change phases.
  • You expect rates to fall. If you believe rates will be lower in 5 years than today, the ARM lets you benefit without refinancing. (Refinancing costs $3-6k in closing fees you'd avoid.)
  • You can comfortably afford the worst-case payment. If your income is high enough that a 2% jump wouldn't hurt, the rate savings up front are essentially free money.

When an ARM is dangerous

  • You're stretching to buy. If the intro rate is what made the house affordable, the post-adjustment rate could be ruinous.
  • You're staying long-term. Over 30 years, the math almost always favors the fixed rate — predictability is worth more than the early discount.
  • Rates are at historic lows. If fixed rates are already cheap, you're betting they'll go lower. They rarely do.

The hidden assumption

Most ARM marketing implicitly assumes rates will be similar or lower at adjustment. They might be much higher. The 2008 ARM crisis was largely people who took 2/28 ARMs assuming they could refinance before the rate jumped — and then home values dropped, refinancing wasn't possible, and the rate jumped from 6% to 11%.