With 30-year fixed rates around 6.5%, a 5/1 ARM at 5.75% saves roughly $200/month on a typical California loan. But is the risk worth it?
How ARMs work
An adjustable-rate mortgage gives you a fixed rate for an initial period (5, 7, or 10 years), then adjusts annually based on a market index plus the lender's margin. Rate caps limit how much it can change.
Common ARM types in 2026
5/1 ARM -- Fixed for 5 years. Current rates around 5.5%-5.75% vs. 6.25%-6.5% on a 30-year fixed. Best for buyers planning to sell or refi within 5 years.
7/1 ARM -- Fixed for 7 years. Rates around 5.75%-6.0%. Best for moderate-term ownership (5-10 years).
10/1 ARM -- Fixed for 10 years. Rates around 6.0%-6.25%. Smaller savings, but more runway before adjustment.
How adjustments work
After the fixed period, your new rate = index (SOFR) + margin (typically 2.25%-2.75%).
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Example after year 7 on a 7/1 ARM: if SOFR is 4.5% and your margin is 2.5%, the new rate is 7.0%.
Rate caps: your protection
ARMs have three caps:
- Initial adjustment cap: max increase at first adjustment (usually 2%-5%)
- Periodic cap: max increase per year after that (usually 2%)
- Lifetime cap: max rate over the life of the loan (usually 5% above start rate)
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
On a $600K loan: a 5/1 ARM at 5.75% saves $293/month vs. a 30-year fixed at 6.5%. Over 5 years, that's $17,580 saved.
If you sell or refi before the first adjustment, you keep those savings. If you stay 30 years, the rate adjusts and could cost more over time.
Rule of thumb: ARMs save money if you sell or refi before the first adjustment.
When ARMs make sense
- You're selling within 5-7 years. Relocating, upgrading, or downsizing -- take the lower rate.
- You expect income to increase. A future raise means you can handle higher payments if needed.
- You plan to refinance. If rates drop in 3-5 years, you refi before the ARM adjusts.
- You're a jumbo borrower. ARM savings on a $2M loan can top $500/month.
When ARMs are risky
- You're stretching to qualify. If you only qualify because of the lower ARM rate, you're in trouble.
- Rates are rising. ARM adjusts up, and you face payment shock.
- You're staying long-term with no plan to refi. A 30-year fixed gives you certainty.
- You can't handle payment increases. Fixed income or tight budget -- stick with fixed.
ARM vs. fixed: the math
$700K loan in Orange County:
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| Loan Type | Rate | Payment | 5-Year Cost |
|---|---|---|---|
| 30-year fixed | 6.5% | $4,424 | $265,440 |
| 5/1 ARM | 5.75% | $4,082 | $244,920 |
| 7/1 ARM | 6.0% | $4,196 | $251,760 |
ARM saves $20K+ in the first 5 years. The question: will you sell or refi before adjustment?
Real-world example
David, a tech manager in San Jose, buys a $1.2M home and plans to relocate in 5 years. He picks a 5/1 ARM at 5.5% vs. fixed at 6.25% on a $960K loan (20% down). Savings: $450/month. He sells in year 4, saves $21,600, and never faces an adjustment.
Hybrid strategy: take the ARM, refi later
Lock a 7/1 ARM and save money for 7 years. If rates drop by year 5, refi to a 30-year fixed. If you can't refi (job loss, market crash), accept the adjustment or sell. This works if you're disciplined and monitor rates.
Get A Quote to see if an ARM fits your situation.
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