Lower intro rates than fixed loans — built with caps, a clear adjustment schedule, and a refinance plan baked in. Right for the right holding period; wrong for the wrong one. We'll be honest about which is which.
ARMs typically price below comparable fixed rates — meaningful monthly savings during the fixed period.
Most ARMs cap the first adjustment, periodic adjustments, and the total lifetime change — predictable downside.
Adjustments are formulaic: index (SOFR) + your fixed margin. No surprises in how the new rate is calculated.
You can refinance into a fixed loan anytime — typically 6–12 months before the first adjustment if conditions warrant.
If you sell or refinance before year 7, you bank roughly $13,600 and never see an adjustment. If you stay, the worst-case first-adjustment payment is ~$3,668 — manageable on most files, but the right call is to refinance into fixed first.
For illustration only. Numbers are hypothetical and don't represent an offer, rate lock, or guarantee. Actual rates, payments, fees, and qualification depend on your credit profile, the property, the lender, current market conditions, and required taxes & insurance. APR will differ from interest rate. 8Twelve Mortgage is an independent brokerage and arranges — but does not make — loans. Equal Housing Opportunity.
Every ARM has two parts: a fixed period at a known intro rate, then an adjustment period where the rate resets periodically based on an index. The two numbers in '5/6' or '7/6' tell you both: fixed for 5 (or 7) years, then adjusts every 6 months.
ARMs have three caps that limit how much the rate can move. The 'initial cap' limits the first adjustment after the fixed period ends. The 'periodic cap' limits each subsequent adjustment. The 'lifetime cap' limits how high the rate can ever go above the start rate. Typical structure is 2/2/5: 2% max first move, 2% max per subsequent move, 5% max over life.
ARMs reward people with a clear, short-to-medium holding plan. If you know you'll sell or refinance inside the fixed window, you bank the rate savings and never see an adjustment. The risk shows up only if you stay past the fixed period without refinancing — and that's a refinance to plan for, not panic about.
If you're buying your forever home, or you can't comfortably afford the loan at the lifetime cap rate, an ARM is the wrong shape. The savings during the fixed period won't cover the rate exposure later, and the cognitive load of tracking adjustments isn't worth it.
When the fixed period ends, your new rate equals the current SOFR (the index) plus your loan's margin (set at origination, typically 2.75–3.00%). That sum is the 'fully indexed rate.' If it's lower than your current rate, your payment drops. If higher, the caps limit how far it can climb in any one period.
The first number is the years your rate is fixed. The second is how often it adjusts after that. A 5/6 ARM is fixed for 5 years, then adjusts every 6 months. Common variants: 5/6, 7/6, 10/6, and the older 5/1, 7/1, 10/1.
ARMs have caps — typically a 2% maximum on the first adjustment, 2% on subsequent adjustments, and 5% over the life of the loan. So a 5/6 ARM starting at 6% could go to 8% at year 5, but couldn't exceed 11% ever.
Today's spread varies, but ARMs typically price 0.25–0.75% below comparable fixed rates. On a $500k loan, that's roughly $80–250/mo — meaningful if you'll be out of the loan before the first adjustment.
Modern ARMs adjust against SOFR (Secured Overnight Financing Rate) plus a margin (usually around 2.75–3.00%). Older ARMs used LIBOR or COFI. The index plus margin equals your new fully-indexed rate at adjustment.
Yes, anytime. The most common play is to refinance into a fixed rate 6–12 months before the first adjustment if fixed rates are reasonable, locking in certainty before the reset window opens.
Only in specific situations — high-income earners with variable comp who want minimum required payment flexibility. The risk is you build no principal during the interest-only period and could end up underwater if values drop.
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