ARM 5/1 vs 7/1 vs 10/1 vs 30y Fixed Comparison

ARMs (adjustable-rate mortgages) start with a fixed-rate period (5, 7, or 10 years) then adjust annually. For buyers planning to sell or refinance within the fixed period, ARMs typically beat 30-year fixed by 0.5-1.0% on initial rate — saving thousands. This calculator runs all four products against your expected hold period.

When ARMs Beat Fixed Rates

ARMs win when your expected hold is shorter than or equal to the fixed period. 7-year ARM at 6.25% beats 30-year fixed at 7.0% by $60-100/month, saving $5-9K over the 7-year fixed period. The math also favors ARMs in declining rate environments — if rates drop before the reset, you refinance to a lower fixed rate. ARMs are riskier in rising-rate environments where you can't refinance.

ARM Index, Margin, and Caps

After the fixed period, ARM rate = index + margin. Common indices: SOFR (1-yr or 30-day average), 1-year Treasury. Margin: typically 2.25-2.75%. Caps protect borrowers: initial adjustment cap (typically 2%), periodic adjustment cap (2% per year), lifetime cap (5%). Worst case: a 5/1 ARM starting at 6% can reach 11% by year 7 (5% lifetime cap). Read the loan estimate carefully — caps vary by lender.

Refinance Risk in Rising Rates

The biggest ARM risk: rate environment shifts higher AND your circumstances change (lose job, can't refinance, can't sell at expected price). Always stress-test your budget against the worst-case post-reset payment. If you can't afford 5% above your initial rate, choose a fixed-rate product instead. Source: CFPB, Freddie Mac, FHFA ARM guidelines.

Last updated May 2026. Sources: CFPB ARM.