ARM Basics: How Adjustable-Rate Mortgages Work – Updated 2026

Adjustable Rate Mortgages, also known as ARMs, come in a lot of shapes and sizes. This post focuses on fixed-period ARMs — the 3/1, 5/1, 7/1, 10/1 (and their more common modern cousins, the 5/6, 7/6, and 10/6) — that carry a fixed rate for an initial period before adjusting.

How the Numbers Work

We’ll use the 5/6 ARM to make this easy, since it’s the most common structure today. The first digit (5/6) is how long the initial rate is fixed — 5 years, or 60 payments. The second digit (5/6) is how often the rate adjusts after that fixed period — every 6 months. You’ll still see older 5/1, 7/1, and 10/1 structures around, where the “1” means the rate adjusts once a year instead of every 6 months. But for conforming ARMs sold to Fannie Mae or Freddie Mac, the 6-month adjustment structure is now standard — it’s actually the reverse of how things worked when I first wrote about this back in 2007, when annual adjustment was the default and 6-month ARMs were the less common variant.

Understanding Your CAPS

Your CAPS restrict how high or low your ARM can adjust. Like everything else with ARMs, they vary — but for conforming SOFR ARMs today, there are two standard structures depending on your fixed period: The first number is how much the rate can adjust at the first adjustment. With 2/1/5 caps, your rate can move up or down by no more than 2% at that first adjustment point. With 5/1/5 caps, it’s up to 5%. The second number is how much the rate can move at every adjustment after that — 1% in both standard structures above. The third number is the lifetime cap — the most the rate could ever move from where it started, in either direction. Add that number to your original note rate to find your ceiling. If your starting rate is 6%, a 5% lifetime cap means your rate could never exceed 11% over the life of the loan — but it also means it could never drop below 1% from rate movement alone. (More on that “could never drop below” part in a minute, because there’s a separate floor that usually kicks in first.)

The Index: SOFR Has Replaced LIBOR

When your fixed period ends, your new rate is calculated from an index plus your margin. Back when I originally wrote this post, that index was LIBOR. LIBOR was phased out for U.S. dollar lending by mid-2023, and virtually all ARMs originated today use SOFR (the Secured Overnight Financing Rate) instead — specifically, the 30-day average SOFR, published daily by the Federal Reserve Bank of New York. The mechanics are the same as they’ve always been: at each adjustment, your lender takes the current index value, adds your margin, and that sum (rounded to the nearest 0.125%, subject to your caps) becomes your new rate.

Your Margin

The margin is the markup your lender adds to the index, and it’s set once at closing — it never changes for the life of the loan. Current margins typically run 2% to 3.5%, though the exact number depends on your lender, the loan program, and your credit profile.

The Rate Floor — A Newer Wrinkle

Here’s something that didn’t really apply the same way back in the LIBOR era: most SOFR ARMs today build in a rate floor equal to your margin. So if your margin is 2.75%, your rate can never drop below 2.75% during the adjustable period — even if SOFR itself falls all the way to zero. In practice, the floor is usually what actually limits how low your rate can go, more often than the lifetime cap on the downside.

Interest-Only ARMs Are a Different Animal

The caps and margin mechanics work the same way on interest-only ARMs — the big difference is when amortization begins. These were far more common (and far more loosely underwritten) before the 2008 financial crisis. Today, interest-only ARMs still exist, but they’re underwritten much more conservatively, and they’re a smaller slice of the ARM market than fully amortizing structures.

How You’re Qualified for an ARM

One genuinely good change since I first wrote this post: federal rules now require lenders to qualify ARM borrowers at the higher of the fully-indexed rate (current index plus margin) or the start rate plus 2% — not just the low introductory rate. That’s a real consumer protection that didn’t exist in 2007, and it’s part of why ARMs today carry meaningfully less payment-shock risk than they did before the crisis. Your lender is also required to give you a CHARM booklet (Consumer Handbook on Adjustable-Rate Mortgages) within a few days of applying, walking through exactly how your specific ARM works.

Find Out Your Specific Numbers

With ARMs, it’s important to know your caps and your margin specifically — these should be disclosed on your Loan Estimate and your lock confirmation. If you’re comparing ARM offers between lenders, make sure you’re comparing the same fixed period, the same cap structure, and the same margin — otherwise you’re not really comparing apples to apples. Your rate and payment can move down as well as up, depending on how the index performs over time — an ARM isn’t a one-way bet against you, just an unpredictable one.

When an ARM Makes Sense

ARMs can be a genuinely useful tool if you don’t plan to keep the property or the mortgage long-term, or if the ARM rate offers a real advantage over a 30-year fixed at the time you’re looking. The math only works in your favor if you actually sell, pay off, or refinance before the fixed period ends and the rate becomes unpredictable.

Frequently asked questions

What index do ARMs use now that LIBOR is gone?

LIBOR was phased out for U.S. dollar lending by mid-2023. Virtually all ARMs originated today use SOFR (the Secured Overnight Financing Rate) instead, specifically the 30-day average SOFR published daily by the Federal Reserve Bank of New York.

What is a 5/6 ARM?

A 5/6 ARM has a fixed interest rate for the first 5 years, then adjusts every 6 months after that. This 6-month adjustment structure is now standard for conforming SOFR ARMs, replacing the older annual-adjustment structure used in ARMs like the 5/1.

How do ARM rate caps work?

ARM caps have three parts: the initial cap limits how much the rate can move at the first adjustment, the periodic cap limits movement at each adjustment after that, and the lifetime cap limits how far the rate can ever move from the starting rate. Standard conforming SOFR ARMs use 2/1/5 caps for 5-year fixed periods and 5/1/5 caps for 7- and 10-year fixed periods.

Can an ARM’s interest rate drop to zero?

No. Most SOFR ARMs include a rate floor equal to the loan’s margin. Even if the SOFR index falls to zero, the rate can’t drop below that margin during the adjustable period.

How are borrowers qualified for an ARM loan?

Federal rules require lenders to qualify ARM borrowers at the higher of the fully-indexed rate (current index plus margin) or the start rate plus 2%, rather than just the low introductory rate. This reduces payment-shock risk compared to pre-2008 ARM underwriting.

When does an ARM make sense instead of a fixed-rate mortgage?

ARMs tend to make sense when you don’t plan to keep the property or mortgage long-term, or when the ARM rate offers a real advantage over a 30-year fixed at the time you’re borrowing. The benefit depends on selling, paying off, or refinancing before the fixed period ends.

  👉 Read: Adjustable Rate Mortgage Guide If you’re weighing an ARM against a fixed-rate mortgage for a home in Washington State, get a rate quote for both and we can compare the real numbers side by side — or if you’re looking at refinancing out of an ARM, here’s a refinance rate quote to start with. Updated in 2026