A fixed-rate mortgage keeps the same interest rate for the whole loan, while an adjustable-rate mortgage (ARM) starts with a rate that is fixed for a set period and then resets at regular intervals. The ARM usually starts lower, but its rate and payment can rise; the fixed loan costs more at the start and never changes. Which one fits depends mostly on whether you could afford the ARM's highest possible payment.
Key takeaways
- In a 5/1 ARM, the 5 is the number of years the initial rate stays fixed and the 1 means the rate then adjusts once a year. In a 5/6 ARM it adjusts every six months, which is how the conforming SOFR ARMs that Freddie Mac buys are set up.
- An ARM's new rate is an index plus a margin, limited by caps. The margin is set in the loan agreement and does not change after closing.
- Cap notation such as 2/2/5 lists the initial adjustment cap, the subsequent adjustment cap and the lifetime cap, in that order. It is not "per adjustment, per year, over life."
- In the illustrative example below, a 5/1 ARM saves about $9,020 over the first five years on a $300,000 loan, and a worst-case 2/2/5 path wipes that out within about two more years.
- The Freddie Mac weekly survey no longer reports ARM rates, so the most reliable read on a current ARM rate is the Loan Estimate each lender gives you.
How the two loan types differ
With a fixed-rate mortgage, the CFPB says, the interest rate is set when you take out the loan and does not change during its term. Principal-and-interest payments therefore stay level. Taxes and homeowners insurance paid through escrow can still move.
An ARM's rate can go up or down. The CFPB notes that ARMs often start with a lower rate than fixed-rate loans, but that the introductory rate lasts only for a limited time, and after that the payment will likely rise. Lenders offer different fixed periods; the CFPB's key-terms page lists 3, 5, 7 and 10 years as the most common.
| Feature | 30-year fixed | 5/1 ARM |
|---|---|---|
| Rate in years 1-5 | Set at closing | Set at closing, usually lower than the fixed rate |
| Rate after year 5 | Unchanged | Index plus margin, within the caps, once a year (every six months on a 5/6 ARM) |
| Principal-and-interest payment | Level for 30 years | Level for 5 years, then recalculated at each adjustment |
| Who carries rate risk | The lender | The borrower, up to the caps |
| Main risk | Paying a higher rate than necessary if market rates fall (refinancing is the usual remedy) | A payment you cannot afford after the fixed period |
How an ARM rate is set
After the fixed period, the CFPB explains, the new rate equals the index plus the margin, subject to any rate caps.
- Index: a benchmark that moves with general market conditions. The lender picks it when you apply, and that choice generally stays the same after closing, although the CFPB's Consumer Handbook on Adjustable-Rate Mortgages (updated September 2026) notes that some loan contracts allow a switch to a different index in certain situations.
- Margin: a fixed number of percentage points the lender adds to the index. It is set in your loan agreement, does not change after closing, and can differ widely between lenders, so it is worth comparing and negotiating.
Older ARMs were often tied to LIBOR. That is no longer possible: the CFPB's 2021 rule noted that, from June 2023, LIBOR could no longer be used for existing contracts, and the same rule updated the sample ARM disclosure forms to reference a SOFR index. SOFR, the Secured Overnight Financing Rate, is the common index today: Freddie Mac's fact sheet says that it and Fannie Mae require the 30-day Average SOFR for newly originated SOFR ARMs, which it buys as 3/6, 5/6, 7/6 and 10/6-month products. Your loan agreement and Loan Estimate name the exact index.
One trap sits in the starting rate. Some lenders offer a "teaser" rate below the fully indexed rate (index plus margin). The CFPB's handbook gives an example: with a 3.5% index and a 2.75% margin, a 5% teaser rate rises to 6.25% at the first adjustment even if the index never moves. Flat market rates therefore do not mean a flat ARM payment.
Reading caps such as 2/2/5
Caps limit how far the rate can move. The CFPB describes three: the initial adjustment cap, the subsequent adjustment cap and the lifetime adjustment cap. The CFPB's ARM handbook confirms that lenders sometimes show them as three numbers in that order, such as 2/1/5 or 5/1/5: first change, each later change, and the total over the life of the loan.
- Initial (first number): the most the rate can change at the first adjustment, measured from the starting rate. The CFPB gives 2 and 5 percentage points as common values.
- Subsequent (second number): the most it can change at each later adjustment, measured from the previous rate. Common values are 1 or 2 points.
- Lifetime (third number): the most the rate can change in total, measured from the initial rate. Five points is the most common, though some loans allow more.
So a 2/2/5 loan can rise 2 points at the first reset, 2 more at each later reset, and never more than 5 points above the starting rate. A 5/1/5 loan can rise a full 5 points at the first reset, which already uses up the lifetime cap, and 1 point per later adjustment, which makes no difference once the lifetime cap is reached. The first number matters most: when it equals the lifetime cap, as in 5/1/5, the entire lifetime increase can arrive in a single step.
A few details are easy to miss. These caps limit the rate, not the loan balance or your income. Some loans also set a floor, a limit on how far the rate can fall, and the CFPB notes it can differ from the limit on increases; the handbook adds that an ARM's rate is generally never lower than the margin. Also, "5/1" and "5/1/5" are different things: the first describes the loan's fixed period and adjustment frequency, the second its caps.
Fixed vs 5/1 ARM, worst case
The example below is illustrative. The Freddie Mac survey does not publish ARM rates, so the 6.50% ARM start rate is an assumption, set 0.75 points under a 7.25% fixed rate (close to the latest survey average for fixed loans). Every payment was computed with the standard amortization formula, recalculated at each adjustment on the remaining balance over the remaining term.
Payment = Balance × (r / 12) / (1 − (1 + r / 12)^(−n))
- Balance is the loan balance at the start of the period ($300,000 at closing).
- r is the annual interest rate in the period, as a decimal.
- n is the number of monthly payments left in the original 360-month term.
Assumptions: $300,000 loan, 360 months, no points, no escrow, principal and interest only. The "worst case" assumes the rate rises by the maximum the caps allow at every adjustment, which is a stress test and not a forecast. The 5/1 rows adjust once a year; the last row shows a 5/6 ARM, which adjusts every six months, with 2/1/5 caps.
| Loan path | Rate | Monthly principal and interest |
|---|---|---|
| 30-year fixed, all years | 7.25% | $2,046.53 |
| 5/1 ARM, years 1-5 | 6.50% | $1,896.20 |
| 5/1 ARM, 2/2/5 caps, year 6 | 8.50% | $2,261.34 |
| 5/1 ARM, 2/2/5 caps, year 7 | 10.50% | $2,642.54 |
| 5/1 ARM, 2/2/5 caps, year 8 onward (lifetime cap reached) | 11.50% | $2,836.81 |
| 5/1 ARM, 5/1/5 caps, year 6 onward | 11.50% | $2,854.58 |
| 5/6 ARM, 2/1/5 caps, months 61, 67, 73 and 79 onward | 8.50%, 9.50%, 10.50%, 11.50% | $2,261.34, $2,451.42, $2,644.98, $2,841.55 |
What the numbers show:
- The ARM payment is $150.33 a month lower for 60 months, a saving of about $9,020 over the first five years.
- Under 2/2/5 caps and the worst-case path, the payment in year 6 is already $214.81 above the fixed payment and reaches $2,836.81 from year 8, which is $790.28 a month above the fixed loan and $940.61 above the ARM's starting payment. The cumulative saving is gone in month 83, about two years after the first reset.
- Under 5/1/5 caps the full increase arrives at the first reset, and the cumulative saving is gone in month 72, at the end of the first year after it.
- The 5/6 ARM with 2/1/5 caps climbs in smaller steps but more often, reaches the 11.50% ceiling in month 79, six months sooner than the 2/2/5 path, and loses the saving in month 81.
- After year 5 the ARM keeps adding to the saving only in periods when its reset rate stays below about 7.34%, the rate at which its payment on the remaining $280,833 balance equals the fixed payment. If the 6.50% start rate was a teaser below the fully indexed rate, the payment rises at the first reset even when market rates stay flat. The outcome depends on the index at each reset, which no one can know at closing.
The practical reading: an ARM is a bet that you will sell, refinance or pay the loan down before the saving runs out, or that the index will not rise to the caps. The CFPB's guidance is to confirm you could still afford the loan at the maximum allowed rate and payment, and not to count on selling or refinancing before the rate changes.
Where rates stand now
Freddie Mac's Primary Mortgage Market Survey reported an average 30-year fixed rate of 7.18% as of November 5, 2026, down from 7.24% the week before and up from 6.22% a year earlier. The 15-year fixed averaged 6.57%. The survey covers prime conventional conforming purchase loans, so an individual quote will differ with credit score, down payment, points and loan size.
The same page states that adjustable rates were discontinued from the survey in November 2022. No national ARM average from that source exists, so the size of the ARM discount today is best read from actual Loan Estimates. Whatever the discount, comparing the first-five-year saving against the worst-case path, as above, tells you more than the headline rate.
What the lender must tell you
Under Regulation Z, § 1026.20(c) and (d), the creditor, assignee or servicer of a closed-end ARM secured by your principal dwelling must send written notices before a rate change. The first adjustment gets an early warning, at least 210 and no more than 240 days before the first adjusted payment is due, in a separate document. Every adjustment that changes the payment, the first included, also gets a notice at least 60 and no more than 120 days before the new payment is due (25 to 120 days for certain loans that adjust every 60 days or more often).
The notices show the current and new rate and payment, the index, the margin, the limits on increases, and any prepayment penalty. The first-adjustment notice also lists alternatives such as refinancing, selling, a loan modification or forbearance, and points to housing counselors. ARMs with terms of one year or less are exempt, and there are narrow exceptions for a first adjustment that falls within the first 210 days after closing.
Frequently asked questions
Does a 5/1 ARM always adjust once a year?
Yes, a 5/1 ARM adjusts yearly after its five fixed years, but not every five-year ARM is a 5/1. The second number is the adjustment interval: the CFPB's handbook explains that a 5/6 ARM (also written 5/6m) adjusts every six months, and its sample Loan Estimate for a 7/6 ARM shows the first change at the start of month 85. The SOFR ARMs Freddie Mac buys are all six-month products. Check "Change Frequency" in the Adjustable Interest Rate table on page 2 of your Loan Estimate.
Can the lender change the margin after closing?
No. The CFPB says the margin is set in your loan agreement and does not change after closing. Only the index moves, and the index itself generally stays the same after closing unless the contract allows a switch in certain situations. Margins vary a lot between lenders and can be negotiated, so compare them across offers.
How much warning comes before an ARM rate change?
The servicer (or the creditor or assignee) must send a separate first-adjustment notice 210 to 240 days before the first adjusted payment is due, and a notice 60 to 120 days ahead of each payment change. If the new rate is not yet known, the first notice may show an estimate, labeled as such; if the payment changes, a second notice with the actual figures follows two to four months before the new payment is due.
What if the adjusted payment is unaffordable?
The first-adjustment notice must list alternatives: refinancing, selling the property, modifying the loan, or arranging forbearance. It also gives a phone number for borrowers who expect trouble and points to housing counselor resources. Contacting the servicer early, before the new payment is due, leaves the most options open.
Does the ARM rate ever go down?
Yes. If the index falls, the new rate can be lower at an adjustment, and the CFPB notes that the first adjustment cap can apply to decreases as well as increases. Some loans set a separate floor, and the CFPB's handbook says the rate is generally never lower than the margin, so it may not fall as far as the index does. The Loan Estimate's Adjustable Interest Rate table lists the minimum and maximum rate.
Questions to ask before you choose
- Ask each lender for the highest rate and payment the loan could reach, and check that you could pay it from current income. The CFPB notes that you can find this on your Loan Estimate, which lenders must provide within three business days after you apply.
- Compare all three caps, not only the starting rate. Two ARMs with the same start rate can have very different worst cases.
- Compare the margin and ask which index the loan uses.
- Estimate how long you will keep the loan. A short, certain stay favors the ARM's lower early payment; an uncertain or long one favors the fixed payment.
- Ask whether a prepayment penalty applies if you refinance or sell. If you are offered points, the CFPB's handbook warns that on an ARM they often lower the rate only until the end of the initial period.
- Run the same worst-case table as above with your own loan amount and the lender's actual caps. The CFPB's ARM handbook includes a worksheet for comparing ARM and fixed-rate offers side by side.
This article is general education, not personal financial advice. A HUD-approved housing counselor or licensed loan officer can run your actual figures.
Sources
- CFPB: With an ARM, what are rate caps and how do they work?
- CFPB: For an ARM, what are the index and margin?
- CFPB: Mortgage key terms
- CFPB: What is a fixed-rate mortgage and an ARM?
- CFPB: Final rule to facilitate the transition from LIBOR (December 7, 2021)
- CFPB: Regulation Z, 12 CFR 1026.20 (ARM notices)
- Freddie Mac: Primary Mortgage Market Survey
- CFPB: Consumer Handbook on Adjustable-Rate Mortgages (last updated September 2026)
- Freddie Mac: SOFR ARMs Fact Sheet (November 2022)
