A fixed-rate mortgage keeps the same interest rate and principal and interest payment for the life of the loan. An adjustable-rate mortgage, or ARM, starts with a fixed rate for a set period, commonly five, seven or ten years, and then adjusts periodically based on a market index. ARMs make sense when the starting rate is meaningfully lower and you have a real reason to expect to sell, refinance or pay down the loan before the adjustments matter.
How an ARM is built
An ARM named "7/6" has a fixed rate for seven years, then adjusts every six months. The pieces:
- Index: a published market rate, today most commonly SOFR, the Secured Overnight Financing Rate. It moves with the market.
- Margin: a fixed number the lender adds to the index. It never changes over the life of the loan.
- Fully indexed rate: index plus margin. After the fixed period, your rate moves toward this, limited by the caps.
- Caps: limits on how much the rate can change. They are usually written as three numbers, such as 5/1/5:
- the most it can change at the first adjustment,
- the most at each later adjustment,
- the most it can ever rise over the start rate for the life of the loan.
Ask for the caps, margin and index in writing. Your Loan Estimate shows the highest payment the loan could ever reach, and you should read that line before you choose. See How to Read a Loan Estimate.
How an ARM is underwritten
On some programs, shorter ARMs are qualified at a rate higher than the start rate, to make sure you could carry a payment increase. Longer fixed periods are often qualified at the note rate. So an ARM does not always increase the price you can qualify for, even when its starting payment is lower. Ask how the specific product is qualified.
Who an ARM can suit
- Buyers who expect to move within the fixed period: a job relocation, a starter home, a known timeline.
- Jumbo borrowers. On large loans, the spread between ARM and fixed pricing can be wide enough to matter, and jumbo borrowers often have the assets to absorb a reset or pay the loan down. See the Scottsdale Jumbo Loan Guide.
- Borrowers expecting a liquidity event who plan to pay down principal. See Mortgage After a Liquidity Event.
- Physicians in training who expect income to rise sharply.
Who should be careful
- Anyone whose budget could not survive the life cap. Run the payment at the maximum rate. If that number would break you, the ARM is speculation, not planning.
- Anyone counting on "I'll just refinance." Refinancing requires qualifying again, at whatever rates and guidelines exist at the time, with whatever income and home value you have then.
- Long-term owners who plan to keep the home and the loan for decades.
Fixed-rate loans have a hidden advantage
If rates fall, a fixed-rate borrower can refinance. If rates rise, the fixed-rate borrower keeps the old rate. That one-way option is what you are paying for in the higher starting rate. An ARM gives up some of it for a lower start.
The decision in one question
How confident are you, in writing, about where you will be when the fixed period ends? If the answer is "selling or paying it down, and here is why," an ARM deserves a look. If the answer is "probably fine," take the fixed rate and sleep well.
Why ask me
- I answer the question before I sell you anything. If renting, waiting or a different program is the better move, I will say so.
- Real numbers, not a calculator guess. I price your actual scenario, side by side, with the fees on the page.
- Every program under one roof. Conventional, FHA, VA, jumbo, and non-QM options like bank statement, DSCR and asset-based loans, so the program fits you instead of the other way around.
- You talk to the principal. Ricky Khamis is President of EPiQ Lending, NMLS #173141, lending in Arizona since 1999 and a 2025 Presidents Club Winner at CMG Home Loans. Direct line: (480) 999-9842.
EPiQ Lending is NMLS #1936984, at 7975 N. Hayden Road, Suite A-101 in Scottsdale. Verify all of it before you trust any of it: Ricky's EPiQ Lending profile, the Scottsdale branch, and the license itself at NMLS Consumer Access. Hold every lender to that standard, including us.
More plain-English answers in the Mortgage Education library.
Equal Housing Opportunity. This is general information, not a commitment to lend or an offer to extend credit. Program guidelines, eligibility requirements and documentation standards vary by investor and change over time. Rates, terms and program guidelines change and depend on credit approval, property appraisal and other qualifying factors. Not all applicants will qualify. This is not legal or tax advice; consult a qualified professional about your own situation.
Find out which program actually costs you less
FHA, conventional and jumbo price the same borrower very differently once the mortgage insurance is compared across the years you will own the home. Tell me the shape of your file and I will run them side by side.
Looking at a specific home? Send me the address and I will run the numbers: rickykhamis.com/analyze
