ARMs are back.
With 30-year fixed rates at 6.5%, a 5/1 ARM at 5.75% saves you $200/month.
But is the risk worth it?
I'm Bill McCoy (CA DRE #01212512). I help clients decide between fixed and ARM loans daily. Here's when ARMs make sense.
What Is an ARM?
ARM = Adjustable-Rate Mortgage
How it works:
- Fixed rate for initial period (5, 7, or 10 years)
- Then adjusts annually based on market index + margin
- Rate caps limit how much it can change
Example: 7/1 ARM
- Fixed rate for first 7 years
- Adjusts annually after year 7
- Rate tied to SOFR index + 2.5% margin
Common ARM Types (2026)
5/1 ARM
Fixed: 5 years
Current rate (2026): ~5.5-5.75%
vs. 30-year fixed: 6.25-6.5%
Savings: 0.5-0.75%
Best for: Buyers planning to sell or refi within 5 years
7/1 ARM
Fixed: 7 years
Current rate (2026): ~5.75-6.0%
vs. 30-year fixed: 6.25-6.5%
Savings: 0.25-0.5%
Best for: Moderate-term ownership (5-10 years)
10/1 ARM
Fixed: 10 years
Current rate (2026): ~6.0-6.25%
vs. 30-year fixed: 6.25-6.5%
Savings: 0.0-0.25%
Best for: Long-term buyers who want some protection
How ARM Adjustments Work
Index: SOFR (Secured Overnight Financing Rate) or other benchmark
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Margin: Lender's markup (typically 2.25-2.75%)
New rate = Index + Margin
Example after year 7 (7/1 ARM):
- SOFR: 4.5%
- Margin: 2.5%
- New rate: 7.0%
Rate Caps (Your Protection)
ARMs have 3 caps:
1. Initial adjustment cap
Max increase at first adjustment (usually 2-5%)
Example: Rate starts at 5.75%, caps at 7.75% at year 8 (even if index says 9%)
2. Periodic adjustment cap
Max increase per year after that (usually 2%)
3. Lifetime cap
Max rate over life of loan (usually 5% above start rate)
Example caps: 5/2/5
- First adjustment: Up to 5%
- Each year after: Up to 2%
- Lifetime: Up to 5% above initial rate
Start rate: 5.75%
- Max year 6: 10.75%
- Max year 7: 12.75%
- Lifetime cap: 10.75%
Broker's Tip: Always ask for the worst-case payment scenario. If you can't afford the max capped payment, don't take an ARM.
Break-Even Analysis
When does ARM save money?
Example: $600K loan
- Fixed 30-year: 6.5% → $3,792/month
- 5/1 ARM: 5.75% → $3,499/month
- Savings: $293/month × 60 months = $17,580
If you:
- Sell in year 4 → saved $17,580 ✓
- Refi in year 6 → saved $17,580 + maybe avoided adjustment ✓
- Stay 30 years → rate adjusts, possibly costs more ✗
Rule of thumb: ARM saves money if you sell/refi before first adjustment.
When ARMs Make Sense
1. You're selling within 5-7 years
Relocating for work, upgrading, downsizing — take the lower rate.
2. You expect income to increase
Future raise or promotion → can handle higher payment if needed.
3. You plan to refinance
Rates might drop in 3-5 years → refi before ARM adjusts.
4. You're buying in a declining rate environment
If rates are falling, ARM adjustments may stay low.
5. You're a jumbo borrower
ARM savings on $2M loan = $500+/month. Material.
When ARMs Are Risky
1. You're stretching to afford the payment
If you qualify only because of the lower ARM rate, you're in danger.
2. Rates are rising
ARM adjusts up → payment shock.
3. You're staying long-term
30-year fixed gives you certainty.
4. You have no plan to refi or sell
Hoping rates drop is not a strategy.
5. You can't handle payment increases
Fixed income, tight budget → stick with fixed.
ARM vs. Fixed: The Math
Scenario: $700K loan in Orange County
| Loan Type | Rate | Payment | 5-Year Cost | 10-Year Cost |
|---|---|---|---|---|
| 30-year fixed | 6.5% | $4,424 | $265,440 | $530,880 |
| 5/1 ARM | 5.75% | $4,082 | $244,920 | ~$520,000* |
| 7/1 ARM | 6.0% | $4,196 | $251,760 | ~$525,000* |
*Assumes rate adjusts to 7% at first adjustment
ARM saves $20K+ in first 5 years.
Question: Will you sell or refi before adjustment?
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California ARM Market (2026)
Who offers ARMs:
- Most major lenders
- Jumbo lenders (ARMs more common on high-balance loans)
Who doesn't:
- FHA (no ARMs since 2012)
- VA (IRRRL adjustable products exist but rare on purchases)
Jumbo ARMs: Common and offer significant savings ($1M-$3M loans).
Real-World Example: David's ARM
David, tech manager in San Jose:
- Buys $1.2M home
- Plans to relocate in 5 years (company rotation)
- Chooses 5/1 ARM at 5.5% vs. fixed at 6.25%
Loan: $960K (20% down)
Savings: $450/month × 60 months = $27,000
Result: Sells in year 4, saves $21,600, never faces adjustment.
Hybrid Strategy: Take ARM, Refi Later
Plan A: Lock 7/1 ARM, save money for 7 years
Plan B (Year 5): Rates drop to 5% → refi to 30-year fixed
Plan C (Year 7): Can't refi (lost job, market crash) → accept rate adjustment or sell
This works if you're disciplined and monitor rates.
FAQ
Q: Can I convert an ARM to a fixed-rate loan?
A: Only by refinancing (new loan, new closing costs).
Q: What if rates spike after my fixed period ends?
A: Your payment goes up, but rate caps limit the increase. Plan for worst-case scenario.
Q: Are ARMs available on investment properties?
A: Yes, but less common. Most investors prefer DSCR fixed-rate.
Q: Can I pay extra principal on an ARM?
A: Yes. No prepayment penalties.
Q: What if I want to refinance but can't qualify?
A: You're stuck with the ARM adjustment. This is the biggest risk.
Q: Should I take a 5/1 ARM if I might stay 10 years?
A: No. Take a 7/1 or 10/1 to be safe.
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Better Offers Inc | CA DRE #01212512