A fixed-rate mortgage holds the same interest rate for the whole term. Your principal and interest payment never changes.
An adjustable-rate mortgage holds a fixed rate for an introductory period, then adjusts periodically against a market index. The intro rate is usually lower than a comparable fixed rate — that discount is the compensation for taking on the uncertainty.
Reading the notation
A 5/1 ARM is fixed for 5 years, then adjusts once a year. A 7/6 ARM is fixed for 7 years, then adjusts every 6 months. The first number is years fixed; the second is how often it moves afterwards.
What the caps actually limit
Caps are usually written as three numbers, for example 2/2/5:
| Cap | Limits | Example on a 2/2/5 |
|---|---|---|
| Initial adjustment | How much the rate can move at the first reset | ±2 percentage points |
| Subsequent adjustment | How much at each later reset | ±2 percentage points |
| Lifetime | Total movement above the start rate, ever | +5 percentage points |
They limit the rate, not the payment. A 5% start rate with a 5% lifetime cap can legally reach 10%. On a $350,000 30-year loan that is the difference between roughly $1,879 and $3,072 a month. The worst case is not hypothetical — it is written into your note, and you should calculate it before signing.
Model the worst case, not the intro rate
| Rate | Monthly P&I | vs 5% start |
|---|---|---|
| 5% | $1,879 | — |
| 6% | $2,098 | +$220 |
| 7% | $2,329 | +$450 |
| 8% | $2,568 | +$689 |
| 9% | $2,816 | +$937 |
| 10% | $3,072 | +$1,193 |
The question is not whether you can afford the intro payment. It is whether you could afford the capped maximum, or would certainly be gone before it could arrive.
When an ARM is genuinely the better choice
- You have a firm, near-term exit. Military orders, a training programme with a known end date, a job you know relocates on a cycle. If you will sell inside the fixed period, you captured the discount and never faced the reset.
- Fixed rates are unusually high and you expect to refinance. Real risk here: you are relying on rates falling and on qualifying again later. Neither is guaranteed.
- You could absorb the capped maximum comfortably. If the worst case is affordable rather than merely survivable, the discount is close to free money.
- Large loan, meaningful spread. On a jumbo balance, even half a point of discount across seven years is substantial.
When to take the fixed rate
- This is your long-term home.
- Your budget is tight and payment certainty matters more than the lowest possible payment.
- You are stretching to qualify. If you can only afford the intro rate, that is the clearest possible signal to take a fixed rate or buy less house.
- You do not want to think about interest rates again.
Questions to ask before signing an ARM
- Which index does it track, and what is the margin added to it?
- What are the three caps, and what payment does the lifetime cap produce?
- When exactly is the first adjustment, and how much notice do I get?
- Is there a prepayment penalty during the fixed period?
- Is there a floor rate below which it will never fall?
The answers are all in the note. A lender who is vague about the lifetime cap is telling you something.
Model both scenarios Run the intro rate, then run the capped maximum. Decide against the second number.
Open the calculator