ARM vs Fixed-Rate Mortgage: Payment Risk Compared
A **fixed-rate** mortgage locks the note rate for the full term. An **ARM** starts lower but resets with an index (SOFR, etc.) after a fixed period. ARMs can work for **short holds** or when you expect rates to fall—but payment shock after reset is the main risk.
Step by step
1. Read the ARM structure
Example: 5/1 ARM = fixed 5 years, then adjusts yearly. Note caps: initial, periodic, and lifetime.
2. Model worst-case reset
Use lifetime cap, not teaser rate, for affordability. If max payment fails DTI, the ARM is too aggressive.
3. Compare total interest
If you sell before adjustment, teaser rate matters. If you stay, fixed may be cheaper insurance against rising rates.
ARM vs fixed
Fixed buys predictability; ARMs trade initial savings for reset risk.
- Fixed-rate: Payment stable; higher start rate; best for long owner occupancy.
- ARM: Lower initial payment; resets; caps limit but do not eliminate shock.
- 5/1 ARM: Common for buyers planning to move or refinance within ~5 years.
- Refinance option: ARM bet often assumes you can refinance—tight credit or falling home values can block that.
Use our calculators
Common mistakes
- Qualifying only at teaser rate
- Ignoring lifetime cap in stress tests
FAQ
Are ARMs bad?
Not inherently—they are a rate-risk product; misuse is affordability at max reset.
What index do ARMs use?
Many US ARMs tie to SOFR plus a margin after the fixed period.