How an ARM is structured
An adjustable-rate mortgage starts with a fixed introductory rate, usually lower than a 30-year fixed, then adjusts once a year based on a market index plus a margin. Three caps limit the movement: the initial cap at the first reset, the periodic cap on each later reset, and the lifetime cap over the starting rate.
| ARM | Fixed for | Adjusts | Common caps |
|---|---|---|---|
| 3/1 | 3 years | Annually | 2 / 2 / 5 |
| 5/1 | 5 years | Annually | 2 / 2 / 5 or 5 / 2 / 5 |
| 7/1 | 7 years | Annually | 5 / 2 / 5 |
| 10/1 | 10 years | Annually | 5 / 2 / 5 |
Reading the result
The calculator assumes your rate rises by the amount you choose at each adjustment, limited by the caps. The gap in monthly payments during the fixed period is your savings; the reset and lifetime-cap payments show the risk. If the ARM only wins when rates never rise, treat the fixed loan as the safer choice.