Fixed vs ARM Mortgage: How to Choose

The 60-second answer

Take the ARM if you can name the year you’ll sell or refinance — and it falls inside the fixed period. A 5/6 ARM at 6.15% vs a 30-year fixed at 6.84% saves about $181 a month on a $400,000 loan, or $10,887 over five years, and you never see a reset. Take the fixed loan if your timeline is uncertain, the worst-case ARM payment would strain you, or you value certainty over savings. An ARM is a plan, not a hope: if “we’ll probably move” is doing the heavy lifting, the fixed loan is the honest pick. Run your numbers in the fixed vs ARM calculator.

How an ARM actually works

An ARM fixes your rate for an initial period, then adjusts with the market within legal caps. The alphabet soup decodes simply: a 5/6 ARM locks the rate for 5 years, then adjusts every 6 months (the old 5/1 ARM adjusted yearly; 6-month adjustments are now standard). A 7/6 locks for 7 years, a 10/6 for 10 — longer certainty costs a slightly higher teaser rate.

When the fixed period ends, the lender looks up the ARM’s index (usually 30-day SOFR), adds your fixed margin (about 2.50%), and that becomes your new rate — subject to three caps. The industry-standard structure is 2/1/5: the rate can rise at most 2 points at the first adjustment, at most 1 point per adjustment after that, and never more than 5 points above the start rate over the loan’s life. So a 6.15% teaser can become at most 8.15% at year six, no matter what the market does. Your payment is then recalculated on the remaining balance over the remaining term. If rates fall, the payment can fall too — caps cut both ways only on the upside; there is no floor promise.

Worked example: $400,000 at 6.84% vs 6.15%

Late-2026 averages for a 740-FICO borrower with 20% down: 30-year fixed 6.84%, 5/6 ARM teaser 6.15% with 2/1/5 caps. On $400,000:

• Fixed payment: $2,618 a month, forever.
• ARM teaser payment: $2,437 a month — $181 less, or $10,887 saved over the 5-year teaser.
• Worst-case first adjustment: the rate jumps the full 2-point cap to 8.15%, and the payment on the remaining $372,901 balance becomes $2,915 a month — a $478.35 monthly shock. This is the payment to budget for, not the teaser.
• Seven-year hold, worst case: the fixed loan costs $219,943 in payments; the ARM costs $216,181 even with the maximum reset. The ARM still finishes $3,762 ahead — because five cheap years outweigh two expensive ones.

The three questions that decide it

• 1. Can you name your exit year? “We’ll sell in 2028 for the school district” is a plan; “we might move someday” is a hope. The ARM wins when the exit lands inside the fixed period — the savings are then pure, with zero reset risk. Every year of uncertainty past the fixed period hands the edge back to the fixed loan.
• 2. Could you carry the worst-case payment? Run the maximum legal first adjustment (teaser + first cap, capped by the lifetime cap) and ask if that payment fits your budget with room to spare. On the $400k example, that’s $2,915 vs the $2,437 teaser — $478 more, every month, potentially for years. If the answer is no, the decision is made: take the fixed loan.
• 3. Is the spread big enough to matter? The ARM’s edge is the gap between the teaser and the fixed rate — about 70 basis points in late 2026, worth ~$181/month on $400k. When the spread compresses toward 25 basis points, the savings barely cover the risk and the hassle; when it widens past a full point, the ARM becomes very hard to refuse for short stays.

Three mistakes buyers make

• Mistake 1: Assuming the move. The classic ARM burn is the buyer who “knew” they’d relocate in year 4, then didn’t — job change fell through, kids settled, market froze — and met the reset unprepared. Discount any exit plan that depends on someone else’s decision, and price the scenario where you stay.
• Mistake 2: Ignoring the caps. Not all ARMs are 2/1/5. Some carry 5/1/5 or 5/2/5 structures where the first adjustment can jump five full points. A 6.15% teaser with a 5-point first cap can legally reset to 11.15% — a completely different risk than the standard structure. Confirm the index, margin, and all three caps in writing before you lock.
• Mistake 3: Refinancing twice and calling it free. The standard ARM exit is a refinance before the reset — but a refi costs 1–2% of the loan in closing costs, and it may not exist when you need it: rates could be higher, your income lower, or your home worth less. Count one refinance’s closing costs against the ARM’s savings, and never take an ARM you couldn’t afford to keep.

The bottom line

In 2026 the ARM-vs-fixed choice is a narrow, rational bet on timing — not the 2000s exotic-loan gamble. Short, certain timeline and a budget that survives the worst case: the ARM’s teaser is nearly free money. Long or uncertain timeline, or a budget that only works at the starting rate: the fixed loan’s certainty is worth its ~70-basis-point premium. Either way, decide with the worst case on paper first: run the fixed vs ARM calculator with your loan amount, both rates, and your honest exit year before you lock.