Lending
Fixed-Rate vs Adjustable-Rate Mortgages
How fixed-rate loans and ARMs work, what the index, margin and caps mean, and who each fits.
Talk to Maggie directly: cell (916) 549-3131 (text or call) · maggie@loveyoursurroundings.coMaggie B. Hopkins, NMLS #349517 · Surroundings NMLS #2528307
What is the difference between a fixed rate and an adjustable rate?
The CFPB explains it on its fixed vs adjustable page (last reviewed January 14, 2025). With a fixed-rate loan, your interest rate is set when you take out the loan and stays the same for its whole life. Your principal and interest payment stays steady.
With an adjustable-rate mortgage (ARM), the rate can go up or down. ARMs often start with a lower rate than fixed loans. After the starting period, the rate changes at set times, and the CFPB notes that payments usually rise. Your property tax and insurance can still change on either kind of loan.
What do the numbers in a 5/6 or 7/6 ARM mean?
The CFPB's mortgage glossary (last modified December 28, 2022) explains the pattern. The first number is how many years your starting rate stays fixed. The second number is how often the rate adjusts after that.
On older ARMs the second number was often a 1, meaning once a year. Many newer ARMs use a 6, meaning every six months. The Federal Reserve Bank of New York's work group on SOFR ARMs (2019 white paper) proposed that six-month reset. So a 7/6 ARM keeps its starting rate for seven years, then can change every six months. Always read the loan's own terms to confirm.
How is an ARM's new rate figured out?
Two pieces set the rate after the fixed period. The CFPB describes them on its index and margin page (last reviewed April 3, 2024):
- The index is a market interest rate that moves over time. Your lender chooses which index your loan uses, and that choice generally stays the same after closing.
- The margin is a fixed number of percentage points the lender adds to the index. It's set in your loan agreement and doesn't change after closing.
Index plus margin equals your new rate, within your caps. Margins vary by lender and loan, so compare them when you shop. Two ARMs with the same starting rate can behave very differently later.
What are ARM rate caps, and why do they matter?
Caps limit how far your rate can move. The CFPB describes three kinds on its rate caps page (last reviewed January 14, 2025):
- Initial adjustment cap. Limits the first change after the fixed period. Common limits are 2 or 5 percentage points.
- Subsequent adjustment cap. Limits each later change. Common limits are 1 or 2 percentage points.
- Lifetime cap. Limits the total change over the loan's life, usually 5 percentage points above the starting rate.
The CFPB's advice is to compare caps, not only starting rates. Ask each lender for the highest payment you could ever owe. Your Loan Estimate also shows it in the Projected Payments table on page 1.
Who might an ARM fit?
An ARM can fit when you have a clear reason to expect a change before the fixed period ends. Some examples:
- You expect to sell within the fixed period, such as a planned move for work.
- You plan to pay the loan down hard, for example after selling another home.
- Your budget can comfortably handle the payment even at the cap.
A fixed rate tends to fit when you want a payment that never changes. It also fits when you expect to stay a long time, or when a payment jump would strain your budget. Many people buying their forever home or downsizing on a fixed income prefer that certainty.
What are the risks of an adjustable rate?
- Payment shock. When the fixed period ends, your payment can rise, sometimes by a lot.
- Plans change. A move you expected may not happen. Home values may not support a sale when you want one.
- Refinancing is not a sure thing. You can't count on rates, your income or your home's value being right for a refinance later. See our refinance page.
Before you choose an ARM, look at the payment at the first cap and at the lifetime cap. If either would hurt, a fixed rate may be the safer choice.
What should you ask a lender before choosing an ARM?
- How long is the fixed period, and how often does it adjust after that?
- Which index does it use, and what is the margin?
- What are the initial, subsequent and lifetime caps? Is there a floor?
- What is the highest monthly payment I could ever owe, and when could it happen?
- Is there a prepayment penalty if I sell or refinance early?
- How does the ARM compare with a fixed rate over the years I expect to keep it?
How do you start comparing fixed and adjustable options?
Fill out the loan options form or call Maggie's cell at (916) 549-3131. Maggie can show you a fixed loan and an ARM side by side. You'll see the payment today, at the first adjustment and at the cap, in dollars.
Test a budget yourself with our mortgage calculator. Rates themselves are explained on our how rates work page.
Frequently Asked Questions
What does 7/6 ARM mean?
The rate stays fixed for the first seven years, then can adjust every six months. Always confirm the schedule in the loan's own terms.
What is the margin on an ARM?
A fixed number of percentage points the lender adds to the index to set your new rate. The CFPB says it's set in your loan agreement and doesn't change after closing.
How much can an ARM rate go up?
Caps set the limit. The CFPB says initial caps are commonly 2 or 5 points, later caps 1 or 2 points, and lifetime caps usually 5 points above the starting rate. Check your loan's actual caps.
Is an ARM a bad idea?
Not always. It can fit if you expect to sell or pay down the loan before the fixed period ends and can handle the payment at the cap. It's riskier if a payment increase would strain your budget.
Can my payment change on a fixed-rate loan?
Your principal and interest stay the same. If your property tax and insurance are paid through an escrow account, that part of the payment can still change.
Talk to Maggie directly: cell (916) 549-3131 (text or call) · maggie@loveyoursurroundings.coMaggie B. Hopkins, NMLS #349517 · Surroundings NMLS #2528307
Loans are arranged through Maggie B. Hopkins, NMLS #349517 · Surroundings NMLS #2528307. This is not a commitment to lend. All loans subject to credit approval and property qualification. Equal Housing Lender.
More in how mortgages work
Ready to make your move with Surroundings?