Pros, cons, and real-world examples
Adjustable-rate mortgages—often called ARMs—get a bad reputation, usually because they’re misunderstood. The truth is, an ARM can be a smart financial tool when used in the right situation and with a clear plan.
Let’s break down how ARMs really work, what the numbers mean, and when they make sense for today’s buyers.
What Is an Adjustable-Rate Mortgage (ARM)?
An ARM is a home loan with an interest rate that starts fixed for a set period, then adjusts periodically based on market conditions.
A common example is a 5/6 ARM:
- Fixed rate for the first 5 years
- Adjusts every 6 months afterward
Other variations include 7/6 and 10/6 ARMs.
How ARM Rates Are Calculated
After the fixed period ends, ARM rates are determined by two main components:
1. The Index
A published benchmark interest rate (such as SOFR) that reflects market conditions.
2. The Margin
A fixed percentage added to the index by the lender.
Index + Margin = Your New Rate
This structure makes ARMs transparent—you always know how your rate is calculated.
What Are Rate Caps? (Your Safety Net)
ARMs include rate caps that limit how much your rate can increase:
- Initial cap – limits the first adjustment
- Periodic cap – limits each adjustment after that
- Lifetime cap – limits the total increase over the life of the loan
These caps are critical protections and prevent extreme payment shocks.
Pros of Adjustable-Rate Mortgages
- Lower initial interest rates
- Lower starting monthly payments
- Strong option for short-term homeowners
- Can outperform fixed loans if rates stay stable or fall
Cons to Consider
- Payments may increase after the fixed period
- Less predictable long-term costs
- Requires planning and monitoring
ARMs reward strategy—not autopilot.
When ARMs Make Sense
ARMs often work well if you:
- Plan to sell or refinance within 5–10 years
- Expect income growth
- Want lower initial payments
- Use the loan as a short-term leverage strategy
At Affinity Home Lending, we help buyers model ARM scenarios so there are no surprises.