Project an adjustable-rate mortgage: index + margin, caps, worst case and the comparison with a fixed rate
Updated October 2026
An adjustable-rate mortgage starts with a rate fixed for a set period, then changes on a schedule. In a 7/6 ARM the first number is the fixed period (7 years) and the second is how often the rate changes after that (every 6 months); older loans such as a 5/1 change once a year. At each change the new rate is the index plus the margin, rounded as your note specifies, but limited by the caps. The index moves with the market; the margin is fixed for the life of the loan and is part of what you shop for.
Everything except the index is in the Adjustable Interest Rate (AIR) table on page 2 of your Loan Estimate: index and margin, initial rate, minimum and maximum rate, when the first change happens and how often after, and the limits on each change. Caps are often written as three numbers, such as 5/1/5: the most the rate can move at the first change, at each later change, and over the life of the loan above the start rate. This calculator treats the margin as the rate floor, which the CFPB notes is the usual case. Enter today’s index value, the years you expect to keep the loan, and a fixed rate to compare against.
The CFPB’s ARM booklet uses a $216,000, 30-year loan: 1-year Treasury (CMT) index + 2.25% margin, 3% start rate, first change at month 61 capped at 2%, later changes 2% a year, maximum 8%. At each change the payment is re-amortized over the remaining term. Starting payment: $910.66. If rates rise as fast as the caps allow:
| Period | Rate | Payment |
|---|---|---|
| Years 1-5 | 6.25% | $2,462.87 |
| Year 6 | 11.25% | $3,654.43 |
Those match the booklet’s Loan Estimate ($1,123 in year 6, $1,350 in year 7, $1,467 from year 8). If the index fell instead, the rate could drop to the 2.25% floor and the payment to about $838.
| Path | Rate | Payment |
|---|---|---|
| Years 1-7 | 6.250% | $2,462.87 |
| From month 85, index flat | 6.637% | $2,547.79 |
| From month 85, worst case | 11.250% | $3,654.43 |
With 5/1/5 caps the first reset can use the full 5-point lifetime cap in one step, which is why the worst case jumps straight to 11.25%. A 5/6 ARM with 2/1/5 caps rises more slowly: 2 points at the first change, then 1 point every six months.
| Case | ARM start payment | ARM paid, index flat | ARM paid, worst case | Fixed at 7.40% paid |
|---|---|---|---|---|
| $400,000 7/6 ARM at 6.25%, caps 5/1/5, SOFR flat, kept 7 years | $2,462.87 | $206,881 | $206,881 | $232,640 |
| Same loan, sold in year 6 (before any change) | $2,462.87 | $177,327 | $177,327 | $199,405 |
| $400,000 5/6 ARM at 6.00%, caps 2/1/5, kept 10 years | $2,398.20 | $296,604 | $352,564 | $332,342 |
| Rates fall 2 points: 7/6 ARM with the index at 1.887%, kept 10 years | $2,462.87 | $283,357 | $338,441 | $332,342 |
"Paid" is principal and interest over the years kept. The ARM wins easily if you sell or refinance before the first change; after that it depends on where the index goes.
LIBOR, once the most common ARM index, is no longer published. Most new conventional ARMs use the 30-day Average SOFR (Secured Overnight Financing Rate), published each business day by the Federal Reserve Bank of New York; it was 3.88686% for October 21, 2026. Freddie Mac’s SOFR ARM summary describes 6-month adjustments, caps of 2/1/5 for 3- and 5-year fixed periods and 5/1/5 for 7- and 10-year, and margins between 1% and 3%. Other ARMs use the 1-year Treasury (CMT) rate; your note names the index.
Read four limits in the AIR table: the minimum and maximum rate, the first-change limit and the subsequent-change limit. The CFPB booklet says your servicer must tell you the new payment seven to eight months before the first adjustment, so you have time to budget or shop for a new loan. Some ARMs start with a discounted "teaser" rate below the fully indexed rate; the CFPB warns that even with a flat index the rate then rises to index plus margin.
Planning on a refinance: rates, home values or your income may not cooperate when the fixed period ends. Budgeting for the start payment only instead of the worst case. Comparing start rates without margins: a lower margin can matter more than a lower teaser. Misreading 5/1/5 as five-year caps. Ignoring the adjustment frequency: a 6-month ARM can change twice a year.
It does not model index rounding (many notes round to the nearest 0.125%), interest-only or payment-option ARMs, negative amortization, prepayment penalties, taxes, insurance or PMI. It assumes the index stays flat, rises as fast as the caps allow, or falls to the floor; real rates will follow none of those exactly. A HUD-approved housing counselor or a fee-only adviser can help weigh an ARM against a fixed rate before you sign.