Adjustable rate mortgages — commonly called ARMs — are one of the most misunderstood options in home financing. While they fell out of favor after the mortgage crisis of the mid-2000s, a well-structured ARM used in the right situation can be a smart, strategic choice for Washington State homebuyers and homeowners.
If you have a clear financial plan and a defined timeline, an ARM may be worth a closer look.
What Is an Adjustable Rate Mortgage?
An adjustable rate mortgage is a home loan with two distinct phases:
- The fixed period — the initial years of the loan where your rate does not change
- The adjustable period — after the fixed period ends, the rate adjusts periodically based on a market index plus a set margin
The most common ARM structures are named for their fixed and adjustment periods. A 7/6 ARM, for example, has a fixed rate for the first seven years, then adjusts every six months after that. A 10/1 ARM is fixed for ten years before adjusting annually.
Check out recent articles about adjustable rate mortgages on The Mortgage Porter.
How ARM Rates Are Calculated
When an ARM enters its adjustable phase, the new rate is determined by adding two components:
- Index — a benchmark rate that moves with market conditions. Most ARMs today use the Secured Overnight Financing Rate (SOFR), which replaced the older LIBOR index when it was phased out in 2023
- Margin — a fixed percentage set at the time your loan is originated, added to the index to determine your adjusted rate
Your loan documents will always specify both the index and the margin for your particular loan.
Understanding ARM Cap Structures
One of the most important — and often overlooked — features of any ARM is its cap structure. Caps limit how much your rate can change, giving you a defined worst-case scenario even in a rising rate environment.
Cap structures are expressed as three numbers:
- First cap — the maximum the rate can increase at the very first adjustment
- Periodic cap — the maximum it can increase or decrease at each subsequent adjustment
- Lifetime cap — the maximum the rate can ever increase above your original starting rate
The ARMs we currently offer carry these cap structures:
- 5/6 ARM — 2/1/5 caps: At the first adjustment, the rate cannot increase more than 2%. After that, each six-month adjustment is limited to 1% up or down. The rate can never exceed 5% above your original starting rate over the life of the loan.
- 7/6 ARM — 5/1/5 caps: At the first adjustment, the rate cannot increase more than 5%. After that, each six-month adjustment is limited to 1% up or down. The rate can never exceed 5% above your original starting rate — which means after the first adjustment, the lifetime ceiling has effectively already been reached and cannot go higher.
Understanding your cap structure is essential before choosing an ARM — it tells you exactly how high your rate could ever go.
Common ARM Structures
| Loan Type | Fixed Period | Then Adjusts | Cap Structure |
|---|---|---|---|
| 5/6 ARM | 5 years | Every 6 months | 2/1/5 |
| 7/6 ARM | 7 years | Every 6 months | 5/1/5 |
At each adjustment point, the loan re-amortizes based on the new rate and the remaining loan term. For example, a 7/6 ARM that first adjusts at year seven will recalculate the payment based on the new rate over the remaining 23 years.
Other Common ARM Structures
| Loan Type | Fixed Period | Then Adjusts |
|---|---|---|
| 5/1 ARM | 5 years | Annually |
| 7/1 ARM | 7 years | Annually |
| 10/1 ARM | 10 years | Annually |
At each adjustment point, the loan re-amortizes based on the new rate and the remaining loan term. For example, a 7/1 ARM that adjusts at year seven will recalculate the payment based on the new rate over the remaining 23 years.
What to Expect at Adjustment
Understanding what happens when your ARM adjusts is one of the most important parts of choosing this loan structure. Here is a plain-language example of how the adjustment works in practice.
Example: 5/6 ARM with 2/1/5 caps
Suppose your starting rate is 6.00%. Here is how the caps define your range of outcomes:
- At the first adjustment (month 61): The rate can move no more than 2% in either direction. Worst case: 8.00%. Best case: 4.00%.
- At each subsequent adjustment (every 6 months): The rate can move no more than 1% in either direction. So from 8.00%, the next adjustment could be no higher than 9.00% or lower than 7.00%.
- Lifetime maximum: The rate can never exceed 11.00% (6.00% starting rate + 5% lifetime cap) — no matter what happens in the market.
Example: 7/6 ARM with 5/1/5 caps
Suppose your starting rate is 5.75%. Here is how the caps play out:
- At the first adjustment (month 85): The rate can move no more than 5% in either direction. Worst case: 10.75%. Best case: 0.75% (though floors set by the margin typically prevent very low adjustments).
- At each subsequent adjustment (every 6 months): The rate can move no more than 1% in either direction.
- Lifetime maximum: The rate can never exceed 10.75% (5.75% + 5% lifetime cap). Notably, with 5/1/5 caps, the first adjustment cap and the lifetime cap are the same — meaning if the rate hits its worst-case ceiling at the first adjustment, it cannot increase further after that.
- Important reassurance for clients: Once the first adjustment has occurred, the rate has already reached or approached the lifetime ceiling. It can only move 1% per period from that point — and can also move downward if market rates fall.
The key takeaway: While no one can predict exactly where rates will be years from now, the cap structure means there is always a defined ceiling. Knowing your worst-case scenario before you close is one of the most important conversations we have.
ARM Loan Highlights
- Fixed rate for an initial period of 5, 7, or 10 years
- Rate adjustments tied to SOFR index plus a set margin
- Adjustments may occur every 6 months or annually depending on the loan structure
- Cap structures protect against unlimited rate increases
- Available for purchases and refinances
- Available on conforming, high-balance, and jumbo loan amounts
- Can be used for primary residences, second homes, and investment properties
- May offer payment flexibility during the fixed period to pay down principal faster
Who Are ARMs Best For?
An ARM may be a strong fit if you:
- Have a clear plan to sell or pay off the mortgage before or near the end of the fixed period
- Are purchasing a home you plan to stay in for a defined number of years — not indefinitely
- Want to maximize cash flow during the fixed period and apply savings toward principal
- Are financing a higher loan amount where the payment difference is meaningful
- Have a financial plan that accounts for what happens at adjustment
An ARM may not be ideal if you plan to stay in the home long-term and want the certainty of a payment that never changes. For those borrowers, a 30-year fixed rate mortgage remains the most straightforward choice.
ARMs for Refinancing
Washington homeowners sometimes refinance into an ARM when:
- They have a defined payoff or move timeline that aligns with the fixed period
- They want to reduce their current payment during a specific life stage
- They are refinancing a jumbo loan where the payment difference is significant
- They plan to pay down the mortgage aggressively during the fixed period
Why Work With a Local Washington Mortgage Advisor?
Choosing between a fixed and adjustable rate mortgage isn’t just about the numbers — it’s about matching the loan structure to your actual financial plan and life situation.
I help clients across Washington State:
- Run side-by-side comparisons of fixed vs. ARM scenarios
- Walk through the real worst-case outcome based on your specific cap structure
- Align mortgage structure with personal timelines and financial goals
- Evaluate whether an ARM makes sense for purchase, refinance, or both
My goal is to make sure you fully understand every option available to you — not just the most obvious one.
Frequently Asked Questions About ARMs
What replaced LIBOR on adjustable rate mortgages? Most ARMs today use the Secured Overnight Financing Rate (SOFR) as their benchmark index. LIBOR was phased out in 2023 and is no longer used for new ARM originations.
What is the difference between a 5/6 ARM and a 7/6 ARM? The numbers refer to the fixed period and adjustment frequency. A 5/6 ARM is fixed for five years and then adjusts every six months. A 7/6 ARM is fixed for seven years and then adjusts every six months. The longer fixed period of the 7/6 ARM gives you more time before any adjustment occurs.
What does the “/6” mean in a 5/6 or 7/6 ARM? The “/6” refers to how often the rate adjusts after the fixed period ends — in this case, every six months. This is different from older ARM structures where adjustments happened annually (noted as “/1”).
Can I refinance out of an ARM before it adjusts? Yes. Many borrowers refinance into a fixed rate mortgage before the end of their fixed period, particularly if their situation or financial goals change.
Is an ARM riskier than a fixed rate mortgage? Not necessarily — it depends entirely on how it is used. An ARM used strategically, with a plan aligned to the fixed period, carries manageable and well-defined risk. The key is understanding your cap structure and having a plan for what happens at adjustment.
Are ARMs available for condos in Washington State? Yes, though condo eligibility is subject to standard project approval guidelines. I can help determine whether a specific condo project qualifies.
Can I make extra payments on an ARM during the fixed period? Yes. Making additional principal payments during the fixed period reduces your balance, which reduces the payment impact at the first adjustment — a strategy worth considering if cash flow allows.
Ready to explore whether an adjustable rate mortgage makes sense for your situation? Contact me or get a rate quote today.
