ARM vs. Fixed Mortgage

An ARM offers a fixed introductory rate (commonly 5, 7, or 10 years), then resets periodically based on a benchmark index (like SOFR) plus a margin. A 7/1 ARM is fixed for 7 years, then adjusts annually. Initial ARM rates are often 0.5%–1.5% lower than 30-year fixed rates, making them attractive for buyers planning to move or refinance before the reset.

Most ARMs cap each adjustment at 1%–2% and have a lifetime cap of 5%–6% above the initial rate. A 6.5% intro rate could rise to 11.5% over time. The "payment shock" - going from a lower-payment intro period to potentially much higher payments - is the main risk of an ARM and the reason they fell out of favor after 2008.

An ARM works well if you plan to sell or refinance before the fixed period ends - common reasons include planned career moves, buying a starter home, or expecting a major life change in 5–10 years. Doing the math: on a $400,000 loan, a 7/1 ARM at 5.5% vs 30-year fixed at 6.75% saves roughly $300/month and $25,000 over 7 years.

A fixed rate guarantees the same principal-and-interest payment for 30 years - no surprises, no payment shock, easier budgeting. The trade-off is paying for that certainty with a higher initial rate. For buyers planning to stay long-term, the peace of mind and protection against rising rates is usually worth the premium.