How Adjustable-Rate Mortgages Work: Resets, Caps and Risks

Published October 12, 2026

Free tool: ARM Calculator→

An adjustable-rate mortgage (ARM) starts with a fixed rate, usually lower than a fixed-rate loan's, and then resets periodically with market rates. It can save money in the early years, but the payment could rise sharply later. This guide explains how ARMs reset, what the caps mean and how to judge the risk, using the free ARM Calculator.

How an ARM works

A 5/6 ARM has a fixed rate for 5 years and then adjusts every 6 months. Other common versions fix the rate for 3, 7 or 10 years. At each adjustment, the new rate is the index plus a margin, limited by the caps:

• Index: a market rate; most new US ARMs use SOFR.
• Margin: a fixed amount the lender adds, set in your loan documents.

What the caps mean

ARM caps are often written as three numbers, such as 2/1/5:

• 2: the first adjustment can change the rate by at most 2 percentage points.
• 1: each later adjustment can change it by at most 1 point.
• 5: the rate can never go more than 5 points above the starting rate.

Caps limit how fast and how far the payment can rise, but they don't stop it from rising.

Example: a 5/6 ARM vs a fixed rate

A $400,000, 30-year loan: a 5/6 ARM starting at 5.75% with 2/1/5 caps, or a fixed rate of 6.5%:

• First 5 years: $2,334.29 a month instead of $2,528.27, about $194 less each month, or roughly $11,600 over five years.
• If the rate resets to 7% and stays there, the payment becomes $2,622.50, and over the full term the ARM costs about $16,628 more in interest than the fixed loan.
• Worst case: the rate rises by the full cap at every adjustment, to 7.75%, 8.75% and 9.75%, and reaches the 10.75% ceiling about six and a half years in. The payment climbs to $3,551.69.

When an ARM can make sense

• You expect to sell or refinance before the fixed period ends, so you get the lower rate without facing a reset.
• You could afford the worst-case payment. Check it before you sign, not after.
• The rate gap is meaningful. The bigger the discount compared with a fixed rate, the more the early savings are worth.

An ARM is risky if you're stretching to afford the starting payment or plan to stay for decades. Refinancing later isn't guaranteed: rates may be higher, or your income or home value may have fallen.

How to use the ARM Calculator

1. Open the ARM Calculator.
2. Enter the loan amount, the loan term and the starting rate.
3. Choose the fixed period (3, 5, 7 or 10 years) and how often the rate adjusts afterwards (every 6 months or every year).
4. Enter the caps from your loan estimate: the first adjustment cap, the later adjustment cap and the lifetime cap.
5. Enter the rate you expect after the reset (index plus margin) and a fixed-rate offer to compare.
6. Read the results: the payment for the fixed period, the payment after the first reset, the worst-case payment, the fixed-rate payment and the lifetime interest compared with the fixed loan, with charts of the payment and the rate over the loan and a table of worst-case rate changes.

Frequently asked questions

What does 5/6 ARM mean?

The rate is fixed for 5 years, then adjusts every 6 months for the rest of the loan.

How high can my ARM payment go?

As high as the lifetime cap allows. With a 5.75% start and a 5-point lifetime cap, the rate can reach 10.75%, and on $400,000 the payment could rise from $2,334.29 to $3,551.69.

Is an ARM cheaper than a fixed-rate mortgage?

At first, usually. Over the long run it depends on where rates go. In the example, the ARM saves about $194 a month for 5 years but costs about $16,628 more in total if it resets to 7%.