You expect to move
If you plan to sell before the fixed period ends, the later adjustments may never reach you. Plans change, so weigh what happens if you stay longer.
Adjustable rate loans
An adjustable rate mortgage, explained in plain English.
An adjustable rate mortgage starts with a rate that is fixed for a set number of years. After that, the rate can change at set times, within limits called caps. Here is how it works, when the rate can change, and who it suits.
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The basics
How an adjustable rate works
The fixed period. The loan starts with a rate that does not change for a set number of years, often five, seven or ten. Your principal and interest payment stays the same during that time.
The adjustment period. After the fixed period, the rate is reset at set times based on a published market index plus a set amount called the margin, both named in your loan documents. On most conventional adjustable loans the rate can change every six months; some other programs change it once a year.
The payment can rise or fall. When the rate changes, your payment changes with it. Before you choose an adjustable rate, ask for the highest payment the caps allow and make sure it fits your budget.
The caps that limit changes
- First change cap: limits how much the rate can move at the first adjustment
- Later change cap: limits how much it can move at each adjustment after that
- Lifetime cap: limits how far the rate can ever rise above the starting rate
The caps, index and margin for your loan are in the disclosures you receive with your loan estimate.
A worked example, in words: a 7/6 ARM. Say you are buying a home you expect to sell before the seventh year ends, and you choose a 7/6 ARM.
- The first seven years. The rate is fixed, so your principal and interest payment stays the same.
- Before the first change. Your servicer tells you the new rate and payment before the change takes effect.
- The first reset. The new rate is the index named in your loan documents plus the margin, and the first change cap limits how far it can move.
- After that. The rate can change every six months, each change limited by the later change cap, and it can never rise above the limit the lifetime cap sets.
- Your plan. If you sell before the fixed period ends, the changes never reach you. Plans change, so check before you choose that the highest payment the caps allow would fit your budget if you stay.
Your loan estimate and the adjustable-rate disclosures show the index, the margin, the caps and how the payment can change for your loan. The loan comparison calculator puts an adjustable and a fixed option side by side using figures you enter; it is an estimate, not an offer.
Is it for you?
When an adjustable rate can make sense
An adjustable rate is a trade-off: a set period of certainty, then a rate that can change. It tends to suit people with a clear plan for the years ahead.
You can handle a higher payment
If your budget could absorb the highest payment the caps allow, the risk of a rise is easier to carry.
Jumbo and portfolio loans
Some jumbo programs, and loans a lender keeps on its own books, are offered mainly or only with an adjustable rate.
Jumbo loansCompare before you choose. A loan officer can quote an adjustable and a fixed rate on the same loan, so you can see the difference in the starting rate and weigh it against the chance of a higher payment later. See how fixed rate loans work.
Compare
Adjustable rate or fixed rate
| Question | Adjustable rate | Fixed rate |
|---|---|---|
| The interest rate | Fixed for a set number of years, then can go up or down at set times, within the caps | Set at closing and never changes |
| Principal and interest payment | The same during the fixed period, then can rise or fall with the rate | The same every month |
| Often chosen by | People who expect to sell or refinance before or soon after the fixed period ends | People who plan to keep the home and the loan for a long time |
| Things to weigh | The payment can rise after the fixed period; refinancing later is never certain | If rates fall later, the only way to a lower rate is to refinance, which has closing costs |
Before you choose an adjustable rate: what to ask
The answers are in your loan estimate and the adjustable-rate disclosures. Ask your loan officer to walk you through them.
- How long the rate is fixed, and how often it can change after that
- Which index the rate follows, and the margin added to it
- The three caps: the first change cap, the later change cap and the lifetime cap
- Whether there is a floor, a lowest rate the loan can reach
- The highest payment the caps allow, and whether it fits your budget
- A fixed rate on the same loan, so you can compare the two, and whether either one has a charge for paying the loan off early
ARM types
Common ARM types: 5/6, 7/6 and 10/6
An adjustable rate mortgage (ARM) is named with two numbers. The first is how many years the rate stays fixed. The second is how often the rate can change after that: a 6 means every six months.
5/6 ARM
The rate is fixed for the first five years, then can change every six months, within the caps.
7/6 ARM
Often called a seven-year adjustable rate mortgage. The rate is fixed for the first seven years, then can change every six months, within the caps.
10/6 ARM
The longest fixed period of the three. The rate is fixed for the first ten years, then can change every six months, within the caps.
Most conventional adjustable loans, and many jumbo ones, follow this pattern. Some other programs, such as a portfolio ARM that a lender keeps on its own books, change the rate once a year after the fixed period. A loan officer can tell you which types fit your loan and quote them beside a fixed rate.
Questions
Common questions about adjustable rate loans
What happens when the fixed period ends?
The rate is reset from the index named in your loan documents plus the margin, within the caps. Your servicer tells you the new rate and payment before the change takes effect.
Can the rate go down as well as up?
Yes. It follows the index, within the caps. Some loans also set a lowest rate, called a floor; it is shown in your disclosures.
Can I refinance into a fixed rate later?
You can apply to refinance at any time, but a new loan depends on your credit, income and home value at that time, and it has closing costs. Do not count on refinancing as your only plan. See refinancing your mortgage.
Which programs offer an adjustable rate?
Conventional loans can be fixed or adjustable, and many jumbo programs offer adjustable rates. Ask a loan officer which options fit your home and your plans.
What is an adjustable rate mortgage?
A home loan whose rate is fixed for a set number of years, often five, seven or ten, and then can change at set times, within limits called caps. After the fixed period, the rate is reset from a published market index plus a set amount called the margin, both named in your loan documents, so the payment can rise or fall.
What moves an adjustable rate?
This page does not state a rate. Two things set it. The starting rate, fixed for the first years, is quoted like any mortgage rate: it depends on the length of the fixed period, the program, how much you borrow compared with the home’s value, your credit, whether you live in the home, any points you pay, and the market on the day you lock. After the fixed period, the rate follows the index named in your loan documents plus the margin, within the caps: the margin is the set amount, and the index is the part that moves with the market. A quote gives you a loan estimate with the rate, the APR and every cost in dollars; ask for a fixed rate quote on the same loan and compare them.
What is a 7/6 ARM?
Often called a seven-year adjustable rate mortgage. The rate is fixed for the first seven years, then can change every six months, within the caps. In the name, the 7 is the number of years the rate stays fixed, and the 6 means it can change every six months after that.
What is the difference between a 7/6 ARM and a 7/1 ARM?
How often the rate can change once the fixed period ends. In both, the rate is fixed for the first seven years. In the name, a 6 means the rate can then change every six months, and a 1 means once a year. Most conventional adjustable loans change every six months; some other programs, such as a portfolio ARM, change the rate once a year after the fixed period. A loan officer can tell you which types fit your loan.
Should I choose an adjustable or a fixed rate?
It depends on how long you expect to keep the loan and how much change in the payment you can accept. An adjustable rate is often chosen by people who expect to sell or refinance before or soon after the fixed period ends, and whose budget could absorb the highest payment the caps allow. A fixed rate suits people who plan to keep the home and the loan for a long time. Ask for both quotes on the same loan and compare them; see fixed rate mortgages.
How will I know what my payment could become?
Your loan estimate and the adjustable-rate disclosures you receive show how the rate is set after the fixed period and how far it can move. Ask your loan officer to walk you through the highest payment the loan allows before you choose it.
Can I get an adjustable rate on a second home, a rental or a jumbo loan?
Yes. A conventional loan can buy a main home, a second home or a rental, with a fixed or an adjustable rate, and many jumbo programs offer adjustable rates. A portfolio ARM, which is adjustable only, can finance a main home, a second home or a rental property. Ask a loan officer which options fit your home and your plans.
Do you lend in my state?
Fidelity Residential is licensed in many states. The full, current list is on NMLS Consumer Access (opens in a new tab), or call us at 732-686-9999.
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This page is general information, not a commitment to lend. Programs, terms and eligibility depend on credit, income, property and underwriting review and are subject to change without notice.
Reviewed by Robert Shamie, CEO, NMLS #241428 · Last reviewed:
Fidelity Residential (PFN Lending Group, Inc., NMLS #103098) is a direct mortgage lender licensed in 40 states and the District of Columbia, with 26 years in business.