An Adjustable-Rate Mortgage (ARM) starts with a fixed introductory period — commonly 5, 7, or 10 years — then adjusts periodically based on a published market index plus a margin set by the lender. A 7/6 ARM, for example, has 7 years fixed, then adjusts every 6 months afterward.
ARMs typically start with a lower introductory rate than a comparable fixed-rate loan, which can make sense for a borrower who's confident they'll sell or refinance before the fixed period ends.
How it works
During the fixed period, your rate and payment don't change at all — it behaves exactly like a fixed-rate loan. Once that period ends, the rate resets based on the current value of the index plus the lender's margin, subject to caps that limit how much it can move at each adjustment and over the life of the loan.
Caps come in a structure — typically an initial cap limiting the first adjustment, a periodic cap limiting each subsequent adjustment, and a lifetime cap limiting the total possible change over the loan's term. Ask your lender to walk through all three numbers before choosing an ARM so you understand the worst-case scenario, not just the starting rate.
Since the 2008 housing crisis, ARM underwriting has become significantly more conservative: most modern ARMs are underwritten as if the rate could reach its higher post-adjustment scenario, meaning borrowers have to qualify for the loan even if the rate moves up — not just the low introductory rate.
When it matters to you
ARMs matter most for borrowers with a defined, realistic timeline to move or refinance — a starter home purchase, a relocation with a known end date, or a bridge plan into a different property.
They matter less for anyone planning to stay long-term in a home, where the certainty of a fixed-rate loan generally outweighs the introductory savings of an ARM.
Common mistakes
- Choosing an ARM purely for the lower introductory terms without a realistic plan for what happens after the fixed period ends.
- Not understanding the difference between the initial, periodic, and lifetime caps before signing.
- Assuming refinancing before the adjustment is guaranteed — rates and personal circumstances can change, so a firm plan beats a hopeful one.
- Overlooking that some ARMs adjust more frequently than expected after the fixed period (every 6 months rather than annually), which changes how quickly payment shock could occur.
FAQs
What does 7/6 mean in a 7/6 ARM?
The first number is how many years the rate stays fixed — 7 years in this case. The second number is how often it adjusts afterward, in months — every 6 months, so twice a year.
Are ARMs riskier than fixed-rate loans?
They carry more uncertainty after the fixed period ends, but modern ARMs are underwritten more conservatively than before the 2008 housing crisis, and adjustment caps limit how much the rate can move at once or over the loan's life.
When does an ARM make sense?
When you have a realistic, defined plan to sell or refinance before the fixed period ends — otherwise a fixed-rate loan generally offers more predictability for the same or comparable starting cost.