Programme
Adjustable-Rate (ARM)
A fixed opening period, and after it a rate that is an index plus a margin, inside caps.
An adjustable-rate mortgage is fixed for a stated opening period and then re-prices on a schedule for the rest of its term. The new rate is not chosen by the lender: it is a published index plus a margin set in your note, rounded and then constrained by three caps. Everything about whether an ARM is sensible for you is contained in two facts — how long the fixed period is against how long you will hold the loan, and what the caps allow the payment to become if you are still there.
- Fixed for the opening period, then adjusts
- Index plus a fixed margin
- Initial, periodic and lifetime caps
- Qualified on the maximum rate in five years
Floor four
What it gives you
The opening rate is usually below the fixed one
You are not paying for thirty years of rate protection, so the opening period is priced accordingly. If your horizon genuinely fits inside that period, the saving is real and it is not a gimmick.
The margin is fixed for the life of the loan
Only the index moves. The margin written into your note at closing is the same margin at every adjustment for thirty years, so the lender cannot widen its spread on you later.
The rate can fall as well as rise
If the index is lower at your adjustment date than at the start, the new rate is lower. On a fixed-rate loan the only way to benefit from falling rates is to refinance and pay to do so.
You must be qualified for the worst of the first five years
Regulation Z requires ability to repay to be assessed on the maximum rate reachable in the first five years, not the opening rate. It does not remove the risk, but it does mean the file was underwritten against a payment larger than the one you start with.
Floor three
What this programme costs you
Every programme buys you something by charging you something else. This is the half a brochure leaves out, and it is the half that decides whether the programme is right for you.
- Trade-off 01
The caps are wide, and the worst case is genuinely large
Caps are quoted as three numbers — initial, periodic and lifetime. A common structure allows five percentage points at the first adjustment and five above the start rate over the life of the loan. That is not a technicality: a five-point rise takes a payment far above where it started, and the caps are the promise, not a forecast. Before signing, work out the payment at the lifetime cap and ask whether you could pay it. If the answer is no, the product is wrong for you regardless of the opening rate.
- Trade-off 02
"I will refinance before it adjusts" is a hope, not a plan
Refinancing needs equity, income, credit and an approval at that future moment. The moment you most want to escape an adjustment is a moment when rates are high — which is also when values are softer, when underwriting tightens, and when your options are worst. Every element of the escape route is outside your control at exactly the time you need it.
- Trade-off 03
You have priced only the opening period, and you keep the rest
A 5-year fixed period on a house you hold for twelve years means you bought certainty for five years and carried the market for seven. The saving in the first five is knowable; the cost of the other seven is not. That asymmetry is the product, and it is only a good deal if the fixed period actually covers your horizon.
- Trade-off 04
Comparing two ARMs is harder than comparing two fixed loans
Index, margin, rounding, first adjustment date, adjustment frequency, and three caps — an offer can look better on the opening rate and be worse on the margin, which is the number that governs twenty-five of the thirty years. The rate you are shown is the least important term in the note.
Floor two
The published rules, and where they come from
These are rules, not prices. This site publishes no rates, so what follows is the part of the programme that is written down somewhere a third party can check.
| Rule | What it says | Source |
|---|---|---|
| Structure | Quoted as two numbers: a 7/6 ARM is fixed for 7 years and then adjusts every 6 months for the remainder of the term. A 5/1 adjusts annually after 5 years. | Fannie Mae Selling Guide B2-1.4-02 (standard ARM plans) |
| How the new rate is set | The index value on the look-back date, plus the margin written in your note, rounded as the note specifies — and then limited by the caps. The margin never changes. | Fannie Mae Selling Guide B2-1.4-02; the note itself |
| Index | Conventional ARMs sold to Fannie Mae and Freddie Mac are indexed to the 30-day Average SOFR published by the Federal Reserve Bank of New York. | Fannie Mae Selling Guide B2-1.4-02; Freddie Mac Seller/Servicer Guide 4401 |
| Caps | Three limits, quoted in order: the maximum change at the first adjustment, the maximum change at each later adjustment, and the maximum increase above the start rate over the life of the loan. A 5/1/5 structure means 5 points, then 1 point each time, and 5 points ever. | Fannie Mae Selling Guide B2-1.4-02 |
| How you are qualified | Ability to repay must be assessed using the maximum interest rate that applies in the first five years after the first payment is due, and a payment that fully amortises at that rate. | 12 CFR 1026.43(c)(5) |
| Notice of an adjustment | The servicer must send the initial rate-adjustment notice 210 to 240 days before the first payment at the adjusted level, and later notices 60 to 120 days before each subsequent change. | 12 CFR 1026.20(c) and (d) |
| Prepayment penalty | An adjustable-rate loan cannot carry a prepayment penalty under Regulation Z — the exception is limited to fixed-rate Qualified Mortgages that are not higher-priced. | 12 CFR 1026.43(g) |
Floor one
Who it fits
The usual guidelines. Every one of them is a starting point that an underwriter reads against the whole file, so treat a line you miss as a conversation rather than a closed door.
- The same credit, income and asset standards as the fixed-rate version of the programme
- Ability to repay assessed on the maximum rate reachable in the first five years
- Available on conventional, FHA and VA loans, with different plan structures
- PMI applies on a conventional ARM above 80% loan-to-value, on the same HPA cancellation rules
- The property may be a principal residence, a second home or an investment property
- The note must state the index, the margin, the rounding, the adjustment dates and all three caps
Ground floor
How it goes, top to bottom
Write down how long you will hold the loan
Not how long you will own the house — how long before you sell or refinance. If that number is longer than the fixed period, you are choosing to carry rate risk.
Calculate the payment at the lifetime cap
Take the start rate, add the lifetime cap, and compute the payment. This is the number the product is really asking you to accept.
Compare margins, not opening rates
The margin governs every rate after the fixed period ends. Two ARMs with the same opening rate and different margins are different loans.
Pre-approval and underwriting
The file is qualified on the maximum rate in the first five years. Expect the approved amount to be smaller than a fixed-rate approval at the same opening rate.
Closing, then diarise the first adjustment
Put the first adjustment date in your calendar with a reminder a year ahead. The servicer must send notice 210 to 240 days before the first adjusted payment, but a year of warning gives you options that seven months does not.
An ARM against a 30-year fixed loan
| Feature | Adjustable-rate | 30-year fixed |
|---|---|---|
| Rate during the opening period | Fixed for the stated period, and usually the lower of the two | Fixed for all 360 months |
| Rate after that | Index plus the margin, within the caps | Unchanged |
| Caps | Initial, periodic and lifetime, stated in the note | Not applicable |
| Rate used to qualify you | The maximum rate reachable in the first five years | The note rate |
| Notice before a change | 210–240 days before the first adjusted payment, then 60–120 days | There is nothing to notify |
| Who carries the rate risk | You, once the opening period ends | The lender, for the whole term |
| Best when | Your horizon fits inside the fixed period and you could still afford the cap | You will stay, or you cannot absorb a large payment increase |
This table scrolls sideways on a narrow screen.
Questions this raises
What do the numbers in "7/6 ARM" mean?
The first number is the length of the fixed opening period in years; the second is how often the rate adjusts after that, in months. So a 7/6 ARM is fixed for seven years and then re-prices every six months for the remaining twenty-three. An older 5/1 convention means five years fixed and then annual adjustments. Neither number tells you anything about how large those adjustments can be — that is the caps, which are quoted separately.
How high can my payment actually go?
As high as the caps allow, and no higher. Take the start rate, add the lifetime cap, and compute the fully amortising payment at that rate on the balance you will have when the fixed period ends. That is the honest worst case. Whether the index ever gets there is unknowable; whether you could pay it is a question you can answer today, and it is the only question that matters before signing.
Is an ARM riskier than it was before 2008?
The product is more constrained than it was. Regulation Z now requires you to be qualified on the maximum rate in the first five years rather than on a teaser rate, negative amortisation and interest-only features cannot be part of a Qualified Mortgage, and the servicer must give you months of written notice before an adjustment. What has not changed is the underlying bargain: after the fixed period, the rate risk is yours.
Which number should I compare between two ARM offers?
The margin first, then the caps, then the opening rate. The margin is added to the index at every adjustment for the rest of the term, so it governs the majority of the loan's life and it never changes. An offer with a lower opening rate and a wider margin is usually the more expensive loan for anyone who keeps it past the fixed period.
Put your own numbers through it
What would the payment actually be? The monthly payment page prints the rule it followed beside the answer, and the address bar carries your inputs so the link you send is the answer you saw.
Or read every programme side by side.