What is a 5/6 ARM?
A mortgage whose rate is fixed for the first five years and may then change every six
months for the rest of the term. The rate after the fixed period is the index plus your
margin, rounded to the nearest eighth of a point, held inside the caps on your note.
The “/6” is the part people miss. The older 5/1 adjusted once a year against
LIBOR; conforming ARMs now adjust every six months against SOFR, which is twice as
often.
What index do ARMs use now that LIBOR is gone?
A 30-day average of the Secured Overnight Financing Rate, published by the Federal
Reserve Bank of New York. Your note uses the figure published 45 days before each change
date, so the rate at your next adjustment is knowable a month and a half ahead.
It was 3.648% on 17 September 2026. It moves broadly with what the Federal Reserve does
to short-term rates.
How high can my ARM rate go?
Your start rate plus your lifetime cap, and not a basis point higher. On a 5.750% start
rate with a 5% lifetime cap, the ceiling is 10.750% for as long as you hold the loan.
Federal law requires a lifetime maximum on every variable-rate loan secured by a
dwelling, 12 CFR 1026.30, so an uncapped consumer ARM does not exist. The
worst-case path above shows what the ceiling costs you and how quickly the caps let you
reach it.
How low can my ARM rate go?
Not below your margin. A Fannie Mae or Freddie Mac SOFR note says the interest rate may
never decrease below the margin, whatever the downward periodic cap would otherwise
allow.
With a 3% margin, 3% is your floor even if SOFR goes to zero. This is the single most
misread line in an ARM note, and it is why the falling-index path above stops where it
does.
What is the margin, and can I negotiate it?
The fixed number added to the index to produce your rate. It never changes for the life
of the loan, and it is set by the lender rather than by the market, which makes it
negotiable in a way the index is not.
It deserves more attention than the start rate, because the start rate governs five
years and the margin governs the other twenty-five. Fannie Mae caps a gross margin at
3.000%.
Why did my payment go up more than my rate?
Because at each change date the payment is recalculated to pay off the remaining balance
over the remaining term. After year five a 30-year loan has twenty-five years left, so
the same rate increase is spread over fewer payments and each one is larger.
The balance being smaller pulls the other way. The schedule above nets the two effects
rather than describing them.
What is the worst my payment could realistically get?
Not realistically, legally. That is the useful version of the question,
because the note answers it exactly. The worst case is every cap binding in turn: the
full first-change cap at your first adjustment, then the periodic cap at each adjustment
after it, until the lifetime ceiling stops the rate and holds it there. Nothing worse
than that can happen on the loan, whatever the index does.
The best case is the mirror image and has a floor most people do not expect: the rate
falls as fast as the caps allow until it reaches your margin, and stops.
Not zero. On a conforming SOFR note the margin is the floor.
The calculator runs both and shows them side by side, change date by change date, along
with the largest single-month increase the worst case produces, which is the number
that actually decides whether an adjustable rate is survivable, and the one no lender
qualifies you on.
What is payment shock, and where does it show up?
Payment shock is the jump at a single change date, as opposed to the drift across the
whole loan. A payment that climbs several hundred dollars over eight years is a different
loan from one that climbs the same amount in one month, and only the second puts people
in default.
On a 5/6 the largest jump is almost always the first adjustment, because the
first-change cap is the biggest single step the note permits, typically 2% on a
5/6 and 5% on a 7/6 or 10/6, and because the payment is re-amortised over the
remaining term at the same moment. Both effects land together.
The calculator reports it as its own figure: the month it lands, the payment before and
after, the size of the jump and what it costs over the following year.
What rate will I be qualified at?
Not your start rate, usually. Regulation Z requires the maximum rate that may apply in
the first five years after your first payment. Fannie Mae adds its own rule: a five-year
initial period qualifies at the greater of the note rate plus the first-change cap, or
the fully indexed rate; longer than five years qualifies at the note rate.
The higher of the two governs. It is why a 7/6 can be easier to qualify for than a 5/6
at the same rate, and why the debt ratio on your approval is not computed on the payment
you will actually make.
Is an ARM a bad idea?
It is a trade, and the terms of it are knowable. You take a lower payment for a defined
number of years and carry the risk of the years after, bounded by your caps. Whether that
is sensible depends almost entirely on how long you will hold the loan, not on a view
about where rates are going.
The two questions worth answering honestly: could you pay the payment at your lifetime
ceiling without changing your life, and how firm is the plan that has you out before the
first change date?
Can I refinance out of an ARM later?
Yes, and conforming ARMs carry no prepayment penalty, so nothing on the loan stops you.
What can stop you is qualifying, income, credit, and the value of the house at the
time, and what rates are when you need to move.
That is the risk people underrate. The plan to refinance is a plan that depends on
conditions in five years, and the years in which you would most want out are the years in
which it is hardest.
Are ARMs assumable?
Many are, after the fixed period ends, and most fixed-rate conventional loans are not.
In a higher-rate market that can be a genuine asset attached to the house, because a buyer
can take over your rate rather than getting a new one.
Read the assumption clause on your note. The lender still underwrites the buyer, and the
terms are specific.
What is the fully indexed rate?
The index plus your margin, rounded the way your note rounds. It is what your rate would
be if it adjusted today, and it is the benchmark both qualifying rules compare
against.
If the fully indexed rate is above your start rate, your loan is discounted and the
first adjustment will move toward the fully indexed rate rather than away from it. Worth
knowing before you assume the first change is a coin toss.
When will I be told my rate is changing?
Twice, and well ahead. The first adjustment gets its own notice 210 to 240 days before
the first adjusted payment is due, seven months. Every later payment change gets a
notice 60 to 120 days ahead. 12 CFR 1026.20(d) and (c).
You should also have received the CFPB’s adjustable-rate mortgage booklet and a
loan program disclosure at application under 1026.19(b). If you did not, ask for them, that is where your caps are written down.
Does an ARM have an APR I can compare?
It has an APR, but comparing it with a fixed-rate APR is not as useful as it looks. An
ARM APR is computed assuming the index stays exactly where it is today, which is a
disclosure convention rather than a forecast.
Total cost over the period you will actually hold the loan, everything paid plus
everything still owed, answers the question an APR is reaching for, and that is
the comparison this page runs.
Should I take a 5/6 or a 7/6?
Three things differ, and only one of them is the fixed period. The 7/6 usually carries a
higher start rate; its first-change cap is typically 5% rather than 2%, so the first step
up can be larger; and it is qualified at the note rate rather than at the greater of the
note rate plus the cap or the fully indexed rate.
So a 7/6 buys two more years of certainty and an easier qualification, and pays for both
with a higher rate and a bigger possible first step. Run each one above over the period
you actually expect to hold it.
