A 5/1 ARM has a fixed rate for the first 5 years, then adjusts every 1 year thereafter based on an index (usually SOFR) plus a margin. If you have a 5/1 ARM at 5% and rates rise, your rate could adjust to 7%, 8%, or higher at each annual adjustment, subject to caps.

Fixed vs Adjustable Mortgages | Coventry Enterprises Group

Q: Are adjustable rate mortgages risky?

ARMs carry inherent rate risk. While they often offer lower initial rates, they can adjust upward substantially after the initial fixed period. Borrowers who took 5/1 ARMs in 2016-2018 faced payment shock as rates rose in 2022-2023. ARMs are best suited for borrowers who plan to sell or refinance before the adjustable period begins.

Q: When does a fixed-rate mortgage make more sense?

A fixed-rate mortgage makes sense when you plan to stay in the home long-term, when rates are historically low, when your budget cannot absorb payment increases, or when the rate difference between fixed and ARM is minimal. In most cases, especially in uncertain rate environments, fixed rates provide important financial security.

Fixed vs adjustable rate mortgage comparison Coventry Enterprises Group

Fixed-Rate Mortgages: Stability and Predictability

A fixed-rate mortgage is the simplest and most transparent mortgage product available. Your interest rate is set at the time of origination and does not change for the life of the loan — whether you have a 15-year, 20-year, or 30-year term.

Advantages of fixed-rate mortgages:

Predictable monthly payment — no surprises for the life of the loan
Protection against rising interest rates
Easier long-term financial planning
Suitable for long-term homeowners who plan to stay for many years
Generally preferred by risk-averse borrowers and financial advisors

Disadvantages:

Higher initial rate than comparable ARMs
If rates fall significantly, you must refinance to capture savings (with closing costs)
Less efficient for short-term owners who will sell before the ARM adjustment period

Adjustable-Rate Mortgages: Lower Start, Rate Risk Later

An adjustable-rate mortgage (ARM) offers a lower initial interest rate in exchange for rate risk after the initial fixed period ends. Common structures include:

5/1 ARM: Fixed for 5 years, adjusts annually thereafter
7/1 ARM: Fixed for 7 years, adjusts annually thereafter
10/1 ARM: Fixed for 10 years, adjusts annually thereafter
5/6 ARM: Fixed for 5 years, adjusts every 6 months thereafter

After the initial fixed period, ARM rates adjust based on a benchmark index (typically SOFR — the Secured Overnight Financing Rate) plus a margin set by the lender. Adjustment caps limit how much the rate can change per adjustment and over the life of the loan.

Understanding ARM Rate Caps — And Their Limits

Most ARMs have three cap numbers — for example, 2/2/5. The first cap (2%) limits the rate change at the first adjustment. The second cap (2%) limits each subsequent adjustment. The third cap (5%) is the lifetime cap — the maximum the rate can ever change from the initial rate. On a 5/1 ARM starting at 5%, the rate could theoretically reach 10% over its life. Build that scenario into your budget before choosing an ARM.

Adjustable rate mortgage ARM rate risk Coventry Enterprises Group education

The Real Risks of ARMs That Lenders Often Underemphasize

Adjustable-rate mortgages are often marketed with an emphasis on the initial rate savings and an underemphasis on what happens after the initial period. Coventry Enterprises Group believes in giving you the complete picture:

Payment shock is real. Borrowers who took 5/1 ARMs in 2018 at 3.5% saw rates adjust to 7-8% in 2023, adding hundreds of dollars per month to their payment.
You may not be able to refinance. If your home value has declined or your credit has worsened since origination, refinancing out of an ARM may not be possible when the adjustment period arrives.
The rate savings may not justify the risk. In many rate environments, the spread between a 30-year fixed and a 7/1 ARM is only 0.25-0.75%. For this small savings, you are taking on significant risk.
Selling on your timeline is not guaranteed. Borrowers who take ARMs planning to sell before the adjustment often discover that circumstances change — job loss, health issues, market downturns — making them unable to sell when expected.

When Does an ARM Make Sense?

Despite the risks, there are legitimate scenarios where an ARM is the appropriate choice:

You have high certainty that you will sell or refinance within the initial fixed period
You are buying a home as a short-term investment (fix-and-flip or near-term appreciation play)
The rate differential between fixed and ARM is large enough (1% or more) to justify the risk
You have significant financial reserves that would allow you to absorb a rate increase comfortably
You are a real estate investor with a defined exit strategy

Frequently Asked Questions

What is the difference between a fixed and adjustable rate mortgage?

A fixed-rate mortgage maintains the same interest rate for the entire loan term. An ARM starts with a fixed rate for an initial period then adjusts based on market indexes. ARMs carry rate risk — your payment can increase significantly after the fixed period.

Are adjustable rate mortgages risky?

ARMs carry inherent rate risk. While they offer lower initial rates, they can adjust upward substantially after the initial fixed period. They are best for borrowers who plan to sell or refinance before the adjustable period begins.

When does a fixed-rate mortgage make more sense?

A fixed-rate mortgage makes sense when you plan to stay long-term, when rates are historically low, when your budget cannot absorb payment increases, or when the rate difference between fixed and ARM is minimal.

What is a 5/1 ARM?

A 5/1 ARM has a fixed rate for the first 5 years, then adjusts every year based on an index plus a margin. With rate caps like 2/2/5, the rate can change significantly from its starting point over time.

Fixed vs Adjustable Rate Mortgages | Coventry Enterprises Group