Mortgage Structure Education
Understanding 5/6, 7/6 & 10/6 SOFR ARMs: Index, Margin & 2/1/5 Rate Caps
Quick Answer (BLUF): Modern Adjustable-Rate Mortgages (ARMs) fix your rate for the initial 5, 7, or 10 years, then adjust every 6 months based on the 30-day average SOFR index plus a fixed margin, subject to strict Initial, Subsequent, and Lifetime rate caps (such as 2/1/5 or 5/1/5).
Visual Cost & Payment Breakdown · Fixed vs. Adjustable-Rate Guide
In brief
An ARM has a fixed rate for an initial period, then adjusts on a schedule. At each adjustment the new rate is the index plus a fixed margin, limited by caps on how far it can move at the first adjustment, at later ones and over the life of the loan. Knowing those four numbers from your disclosure tells you the worst case.
Last reviewed against the primary sources listed below.
ToolAdjustment simulatorYour caps, your index scenario.BasicsARM anatomyThe parts and the schedule.IndexIndexes and SOFRWhat the rate follows.LimitsMargins and capsIncluding 2/1/5.PaperworkARM disclosuresWhere the numbers are.PlanningWorst-case planningBudgeting for the cap.DecisionARM or fixedA decision framework.New guideBefore the resetHow to decide whether to refinance an adjustable-rate mortgage before .New guideConversion optionsHow some adjustable-rate mortgages let you convert to a fixed rate wit.GlossaryKey termsPlain definitions with sources.GuidePayment shockSteps to take before an adjustable rate resets.GuideThe ARM noteWhere the index, margin and caps appear in closing documents.PrintableLender questionsQuestions to bring to any lender, ready to print.
Official primer
The CFPB's ARM handbook is the federal consumer guide to ARMs.