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What is an ARM mortgage?
ARM stands for adjustable-rate mortgage. An ARM mortgage, or ARM loan, has a fixed interest rate for an initial period. On conventional loans sold to Fannie Mae or Freddie Mac, that period is 3, 5, 7 or 10 years. After that, the rate resets to an index plus a margin, within limits called rate caps, and on those loans it adjusts every six months.
Your monthly payment follows the rate up or down. Below, you’ll see how the new rate is set, what labels like “5/6” and “2/1/5” mean, how high an ARM mortgage payment can climb, and how lenders decide whether you qualify.
How an ARM mortgage works
An ARM mortgage has two phases. During the initial period, the rate and the principal and interest payment stay fixed. Once that period ends, the lender recalculates the rate from two numbers written into your note: the index and the margin.
The index: 30-day Average SOFR
The index is a market rate that moves on its own. Every conventional ARM that Fannie Mae buys must use the 30-day Average SOFR (Secured Overnight Financing Rate), published by the Federal Reserve Bank of New York, according to Fannie Mae Selling Guide B2-1.4-02. Freddie Mac has the same rule in Guide Section 4401.1. FHA ARMs may use either the 1-year Constant Maturity Treasury (CMT) or the 30-day average SOFR. At each conventional adjustment, the new rate uses the index value from 45 days before the change date.
The margin: fixed for the life of the loan
The margin is a set number of percentage points that the lender adds to the index. It is written into your note at closing and does not change. Fannie Mae caps the margin at 300 basis points (3.00%), while Freddie Mac requires a margin of 1.00% to 3.00%. So compare margins when you compare ARM quotes.
The fully indexed rate on an ARM mortgage
Index plus margin equals the fully indexed rate, which Fannie Mae rounds to the nearest one-eighth of a percent. Your caps then limit how far the rate can move at any one adjustment.
Here is an example with made-up numbers, not current rates. Say the index is 4.00% and your margin is 2.75%, so the fully indexed rate is 6.75%. If your start rate was 6.00% and your first-adjustment cap is 2 points, your new rate would be 6.75%. However, if the index rose to 6.00% instead, the fully indexed rate would be 8.75%, and the cap would hold your new rate to 8.00%.
The rate can fall, too. On Fannie Mae’s standard plans, per-adjustment caps work in both directions, but the rate can never drop below the margin.
How to read an ARM’s name and rate caps
An ARM’s name gives two numbers. First comes the length of the fixed period in years, followed by how often the rate adjusts after that. So a 5/6 ARM is fixed for five years, then adjusts every six months.
If a quote says “5/1 ARM,” that label means a rate that adjusts once a year after five years. It is the older style on conventional loans, and FHA 5-year ARMs still work this way. The conventional plans that Fannie Mae and Freddie Mac buy now all adjust every six months.
Caps are written as three numbers in this order: initial, periodic and lifetime. For example, 2/1/5 caps mean:
- The rate can rise at most 2 percentage points at the first adjustment.
- After that, it can rise at most 1 point at each later adjustment.
- Over the life of the loan, it can never go more than 5 points above the start rate.
The Consumer Financial Protection Bureau (CFPB) says the initial cap is commonly 2 or 5 points, the subsequent cap 1 or 2 points, and the lifetime cap 5 points.
The four standard conventional ARMs
Fannie Mae’s Standard ARM Plan Matrix and Freddie Mac’s Guide Section 4401.1 (effective November 5, 2025) list the same four products with the same caps.
| ARM | Fixed period | First rate change | Then adjusts | Caps |
|---|---|---|---|---|
| 3/6 ARM | 3 years | 36 months after the first payment is due | Every 6 months | 2/1/5 |
| 5/6 ARM | 5 years | 60 months after the first payment is due | Every 6 months | 2/1/5 |
| 7/6 ARM | 7 years | 84 months after the first payment is due | Every 6 months | 5/1/5 |
| 10/6 ARM | 10 years | 120 months after the first payment is due | Every 6 months | 5/1/5 |
For more on the five-year product, see our guide to 5-year ARMs for first-time home buyers.
Example: how far a 5/6 ARM mortgage payment can rise
Say a buyer takes out a $300,000, 30-year 5/6 ARM at a 6.00% start rate with 2/1/5 caps. This is an example, not a rate quote. The payments below are principal and interest only, so they leave out property taxes, homeowners insurance and mortgage insurance.
| Period | Highest possible rate | Monthly principal and interest |
|---|---|---|
| Years 1–5 | 6.00% | $1,798.65 |
| First adjustment, after 60 payments | 8.00% | $2,154.63 |
| Each later adjustment | 1 point above the prior rate | Recalculated at each change |
| Life of the loan | 11.00% | Depends on the balance then |
After five years of payments, the balance would be about $279,163. If the rate jumped to the 8.00% cap, the payment on that balance over the remaining 25 years would be $2,154.63, about $356 more a month. After that, the rate could rise up to 1 more point every six months until it reached the 11.00% lifetime ceiling. Whether it rises at all depends on the index.
Types of ARM mortgages
Hybrid ARMs
Hybrid ARMs, with a fixed period followed by regular adjustments, are the ARMs that Fannie Mae, Freddie Mac and FHA allow today. Every product in the table above is a hybrid ARM, and each payment pays down principal.
FHA ARMs
FHA-insured ARMs come in 1-, 3-, 5-, 7- and 10-year versions. After the fixed period they adjust once a year, under HUD Handbook 4000.1, section II.A.8.f. Their caps differ from conventional ARMs:
- 1- and 3-year FHA ARMs: up 1 point a year and 5 points over the life of the loan.
- 5-year FHA ARMs: either 1 and 5 points, or 2 and 6 points.
- 7- and 10-year FHA ARMs: up 2 points a year and 6 points over the life of the loan.
FHA does not allow a temporary interest rate buydown on an ARM, and the 3.5% minimum down payment still applies. Our FHA loan requirements guide covers the rest of the rules.
Interest-only ARMs
An interest-only ARM lets you pay only interest for a set period, so the balance does not drop. Fannie Mae buys only fully amortizing ARMs, and a loan that defers principal cannot be a general qualified mortgage (12 CFR 1026.43(e)(2)(i)(B)). So any interest-only ARM you are offered is a non-QM loan outside the standard conforming market.
Payment-option ARMs
A payment-option ARM lets borrowers pay less than the interest due, so the unpaid interest is added to the balance (negative amortization). These loans were common before 2008, and the CFPB says some lenders might still offer them. They cannot be sold to Fannie Mae or Freddie Mac, which require full amortization (Freddie Mac Guide Section 4201.3(a)). They also cannot be qualified mortgages (12 CFR 1026.43(e)(2)(i)(A)).
ARM or fixed-rate mortgage
A fixed-rate mortgage keeps the same rate and principal and interest payment for the full term. An ARM mortgage trades that certainty for a start rate that may be lower, plus the risk of a higher payment later. Our comparison of adjustable-rate and fixed-rate mortgages covers the tradeoffs.
Freddie Mac stopped publishing average ARM rates in its weekly survey in November 2022, so that survey can’t show whether ARMs cost less this week. The survey put the average 30-year fixed rate at 7.11% on November 12, 2026, up from 6.24% a year earlier. Instead, ask each lender for a Loan Estimate on both an ARM and a fixed-rate loan, then compare the rate, margin, caps and closing costs.
Pros and cons of an ARM mortgage
Our guide on when an adjustable-rate mortgage is a good idea covers who an ARM suits.
Pros
- The start rate can be lower than a fixed rate from the same lender, which lowers the payment during the fixed period.
- At an adjustment, the rate can also fall if the index drops.
- An ARM cannot carry a prepayment penalty, so you can sell or refinance at any time.
- On 7/6 and 10/6 conventional ARMs, Fannie Mae generally qualifies you at the note rate, so a lower start rate counts in full.
Cons
- In the example above, the payment could rise about $356 a month at the first adjustment.
- For 3/6 and 5/6 ARMs, lenders qualify you at a higher rate than the start rate.
- A plan to sell or refinance before the reset can fall through if home values drop, rates rise or your income changes.
- Conventional ARMs sold to Fannie Mae or Freddie Mac need at least 5% down, while some fixed-rate loans allow 3%.
Who qualifies for an ARM mortgage
Lenders review credit, income and assets for an ARM mortgage much as they do for a fixed-rate loan. The main differences are the minimum down payment, the qualifying rate and, on some loans, a price adjustment.
- Down payment. Fannie Mae’s Eligibility Matrix allows up to 95% loan-to-value (LTV) on a one-unit primary-residence purchase with an ARM, so plan on at least 5% down. Fannie Mae also charges a 0.250% loan-level price adjustment on ARM purchase loans above 90% LTV, a cost lenders can pass on through the rate or fees. FHA ARMs need the same 3.5% minimum investment as other FHA loans (HUD 4000.1, II.A.2.a.iv).
- Credit score. No single minimum applies to every ARM. Fannie Mae removed its 620 minimum for loans underwritten in Desktop Underwriter (DU) on November 16, 2025, but lenders can still set their own minimums.
- Debt-to-income ratio (DTI). DU allows a DTI up to 50%, according to Selling Guide B3-6-02. Manually underwritten loans and FHA loans use different limits.
The qualifying rate can be higher than your start rate
Lenders must confirm you can afford the payment at a rate that may be higher than your start rate.
| Conventional ARM | Rate Fannie Mae requires for qualifying (B3-6-04) |
|---|---|
| 3/6 ARM | The highest rate possible in the first five years (note rate plus 5 points with 2/1/5 caps, in DU) |
| 5/6 ARM | The greater of the note rate plus the 2-point first cap, or the fully indexed rate |
| 7/6 and 10/6 ARMs | The note rate (for higher-priced loans, the greater of the note rate or the fully indexed rate) |
Federal ability-to-repay rules set a floor as well: lenders must use the fully indexed rate or the start rate, whichever is greater (12 CFR 1026.43(c)(5)(i)(A)). FHA lenders generally qualify you at the initial rate.
In the 5/6 example above, a lender would qualify the buyer at 8.00% (6.00% plus the 2-point first cap), or at the fully indexed rate if that is higher.
Your protections, and what to do before the first adjustment
If your ARM is secured by your primary home, federal rules give you several protections:
- Disclosures when you apply. When you get an application form, or before you pay a non-refundable fee, the lender must give you the CFPB’s Consumer Handbook on Adjustable-Rate Mortgages (the CHARM booklet) and a disclosure for each ARM program you’re considering (12 CFR 1026.19(b)).
- Notice before the first change. Your servicer must send a notice 210 to 240 days before the first payment at the new rate is due (12 CFR 1026.20(d)).
- Notice before later changes. When a later adjustment changes your payment, the notice comes 60 to 120 days before the new payment is due (12 CFR 1026.20(c)).
- No prepayment penalty. A mortgage whose rate can rise after closing cannot carry a prepayment penalty (12 CFR 1026.43(g)(1)(ii)(A)).
Once the first-adjustment notice arrives, you have about seven months to choose a path:
- Refinance. You can refinance into a fixed-rate loan or a new ARM if you qualify then. A conventional refinance is a new loan with new closing costs, so check how much it costs to refinance first.
- Sell. If you planned to move before the reset, this is your deadline.
- Keep the loan. Budget for the new payment in the notice, and expect later adjustments to move it again.
Before you sign for an ARM mortgage, ask each lender for the margin, the caps and the highest payment you could ever owe. Then put those numbers next to a fixed-rate Loan Estimate.
ARM mortgage FAQ
What does ARM stand for?
ARM stands for adjustable-rate mortgage. An ARM loan has a fixed rate for a set number of years, then a rate that changes with an index plus a margin, within caps.
How often does an ARM adjust?
After the fixed period, conventional ARMs sold to Fannie Mae and Freddie Mac adjust every six months. FHA ARMs adjust once a year.
What do 5/6 and 2/1/5 mean?
A 5/6 ARM has a rate fixed for five years that then adjusts every six months. Meanwhile, 2/1/5 caps limit the first adjustment to 2 points, each later adjustment to 1 point, and the total increase to 5 points above the start rate.
What is the fully indexed rate?
The fully indexed rate is the index plus your margin, rounded to the nearest one-eighth of a percent on Fannie Mae loans. It is the rate your ARM loan would carry if no cap applied.
Can I refinance an ARM into a fixed-rate loan?
Yes, if you qualify for the new loan when you apply. Because an ARM cannot charge a prepayment penalty, your main cost is the new loan’s closing costs. Start comparing offers when the first-adjustment notice arrives.
