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Adjustable-rate loans · Florida
Adjustable-Rate Mortgages
An adjustable-rate mortgage, or ARM, gives you a fixed rate for the first 5, 7 or 10 years and then adjusts with the market. If you are likely to sell or refinance before that first adjustment, it can cost less than a 30-year fixed. If you are not, you need to know exactly how high it can go.
Who an adjustable-rate loan is for
An ARM makes sense for clients who expect a significant increase in income or property value in the next several years, plan a short stay in the home, or want to lower their payment during the years they are most likely to keep the loan. As the name says, the rate changes at set intervals, so the question is always how long you really expect to keep this mortgage.
The 7-year and 10-year ARMs are the most popular, because their fixed periods cover the time most people stay in a home or keep a loan before refinancing. A 5-year ARM can price lower still, but it reaches its first adjustment sooner and has to qualify you at a higher rate.
Money saved during the fixed period does not have to be spent. Many borrowers send it to higher-interest debt or to principal, so they owe less when the rate first adjusts.
Today’s ARM rates against the 30-year fixed
| $400,000 loan | Today’s start rate | Principal and interest | Monthly difference | Saved over the fixed period |
|---|---|---|---|---|
| 30-year fixed | 6.875% | $2,628 | Baseline | Baseline |
| 5/6 ARM | 7.125% | $2,695 | $67 more | None |
| 7/6 ARM | 6.750% | $2,594 | $33 less | $2,799 over 7 years |
| 10/6 ARM | 7.125% | $2,695 | $67 more | None |
Par rates from our pricing engine for a Miami-Dade primary residence, 20% down, 780+ credit, 30-day lock. When the gap between ARM and fixed rates is small, the fixed rate is usually the better choice.
How the rate adjusts
The fixed period
A 5/6 ARM is fixed for five years, a 7/6 for seven and a 10/6 for ten. The “6” means the rate adjusts every six months after that. Payments are figured on a 30-year schedule from the start.
The index
Most ARMs now follow the 30-day average of SOFR, the Secured Overnight Financing Rate published by the New York Fed. It replaced LIBOR, the index behind the older 3/1, 5/1 and 7/1 loans.
The margin
A fixed number of percentage points added to the index, set when you close and never changed. Index plus margin is the “fully indexed rate” your loan moves toward at each adjustment.
The first cap
Limits the first change. On a 5/6 ARM it is usually 2%; on 7/6 and 10/6 ARMs it is usually 5%, the same as the lifetime cap.
The periodic cap
Limits each later six-month change, usually to 1%.
The lifetime cap
The most the rate can ever rise above the start rate, usually 5%. Most loans also have a floor, typically the margin.
Caps are written as three numbers: 2/1/5 for a typical 5/6 ARM, 5/1/5 for typical 7/6 and 10/6 ARMs. Jumbo and non-QM ARMs can differ, so we confirm the caps on every quote.
The worst case, in dollars
Before choosing an ARM, look at the payment if every adjustment goes against you. Here is a $400,000 loan with an example start rate of 6.000% under each cap structure. These are not today’s prices; they show how the caps behave. If the market falls instead, the rate can go down at each adjustment, but never below the floor.
5/6 ARM, caps 2/1/5
| Period | Highest possible rate | Payment |
|---|---|---|
| Years 1 to 5 | 6.000% | $2,398 |
| Months 61 to 66 | 8.000% | $2,873 |
| Months 67 to 72 | 9.000% | $3,121 |
| Months 73 to 78 | 10.000% | $3,373 |
| From month 79 on | 11.000% | $3,630 |
7/6 ARM, caps 5/1/5
| Period | Highest possible rate | Payment |
|---|---|---|
| Years 1 to 7 | 6.000% | $2,398 |
| From month 85 on | 11.000% | $3,575 |
Principal and interest only, re-figured on the remaining balance at each change. The 7/6 reaches its ceiling in one step but only after seven years of paying down principal; the 5/6 climbs in smaller steps starting two years earlier.
Qualifying for an ARM
Lenders do not always qualify you at the start rate. On a 5/6 ARM, conventional guidelines use the higher of the start rate plus 2% or the fully indexed rate, which can make a 5/6 harder to qualify for than a fixed loan. On 7/6 and 10/6 ARMs, the start rate is generally used. That rule is one reason the longer ARMs are the more popular choice.
Otherwise the requirements match a conventional fixed loan: 620 credit or better, at least 5% down on a primary home (3% is not available on most ARMs), and mortgage insurance under 20% down. ARMs are also widely used on jumbo loans, where lenders often price them well below their fixed rates, and some bank statement and DSCR programs offer them with an interest-only period.
Do not count on refinancing
An ARM is often chosen with a plan to refinance before it adjusts. That works if rates, your income and your home’s value cooperate when the time comes. Choose an ARM because you could live with the worst-case payment above, not because you are sure you will never see it.
See if an ARM saves you money
Tell us the price or balance and how long you expect to keep the loan. We will price 5/6, 7/6 and 10/6 ARMs against fixed rates and show the break-even and the worst case for each.
- ARM and fixed quotes side by side
- Caps, margin and floor in writing
- No credit pull to start
Prefer to talk it through? Call 954-494-7288.
Tell us about the loan
No credit pull. A loan officer follows up, usually the same day.
Adjustable-rate mortgage questions
What does 7/6 ARM mean?
The rate is fixed for the first seven years, then adjusts every six months for the rest of the loan. The adjustments follow an index, usually the 30-day average SOFR, plus a margin set at closing, within the loan’s caps.
How high can my ARM rate go?
Most conventional ARMs have a lifetime cap of 5% above the start rate. A 5/6 ARM can rise up to 2% at its first adjustment and 1% at each later one; 7/6 and 10/6 ARMs can rise up to 5% at the first adjustment.
Is an ARM cheaper than a fixed-rate mortgage?
Usually during the fixed period, but not always. The gap changes with the market, and when ARM and fixed rates are close, the fixed rate is generally the better choice. We price both on the same day for your scenario.
Can I refinance an ARM into a fixed rate later?
Yes, there is no prepayment penalty on conventional ARMs. Whether a refinance makes sense then depends on rates, your equity and your income at that time, so it is best treated as an option rather than a plan.
Why do lenders qualify me at a higher rate on a 5/6 ARM?
Because the first adjustment comes sooner and can be up to 2%, conventional guidelines qualify a 5/6 ARM at the higher of the start rate plus 2% or the fully indexed rate. 7/6 and 10/6 ARMs generally qualify at the start rate.
Are interest-only ARMs available?
Yes, through jumbo and non-QM programs. Payments cover only interest for an initial period, then rise to repay principal over the remaining term, so we always show both payments before you choose.
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See whether an ARM beats a fixed rate today
Get a no-obligation rate and closing cost analysis with ARM and fixed options side by side, including the worst-case payment for each.