5/1 vs. 7/6 vs. 10/6 adjustable-rate loans: A guide

If you’re researching adjustable-rate loans, you're probably wondering what terms like “5/1,” “7/6,” and "10/6" mean. These numbers refer to the reset schedule for adjustable-rate mortgage (ARM), specifying when and how much the interest rate can change.

Let's explore how the interest rate changes on an ARM and the pros and cons of each reset schedule. We’ll look at the factors you should consider when choosing the right reset structure for your budget and needs. Reviewing these options helps you find the perfect fit for your financial goals.

How do adjustable-rate mortgages work?

ARMs, also known as variable-rate mortgages, have a fixed mortgage rate for a set period. Once the initial rate expires, the rate will change at specific adjustment intervals based on market conditions, subject to rate caps.

The benefit of an ARM compared with a fixed-rate mortgage is that you usually get a lower interest rate and a lower monthly payment to start with. Once rates start to adjust, they can increase, but they also can go down. Buyers clients interested in an ARM should be comfortable with their rates and monthly mortgage payment possibly increasing. Fixed-rate mortgages provide more financial certainty.

When it’s time to adjust your rate, the lender bases the change on an index, a margin, the interest rate caps, and the interest rate floor.

To understand how adjustable-rate mortgage terms work, it helps to look at an example. We will be using a mortgage advertised by the lender as a 7/6 ARM 2/1/5.

Initial fixed-rate period

Most ARMs start off with a fixed mortgage interest rate for a set number of years, typically 5, 7, or 10. The first number you see in an ARM ad is the fixed-rate period. In our example of the 7/6 ARM 2/1/5, the interest rate is fixed for 7 years.

Adjustment time frames

After the initial rate expires, the mortgage interest rate on your ARM will adjust – typically at intervals of 6 months or 1 year. If it’s every 6 months, the second number in the advertisement will be a 6. If it adjusts each year, the number is 1.

In our example of the 7/6 ARM 2/1/5, the rate adjusts every 6 months after the fixed period.

Your mortgage servicer must notify you in advance of the rate adjustment. For the initial adjustment, your lender must notify you of the change no later than 210 days and no earlier than 240 days before the due date of the first payment under the new rate. Notification of subsequent adjustments typically is required 60 – 120 days before the first payment under the new rate.

Indexes

When your rate adjusts, your lender will base the change on an index tied to larger markets. If the index increases, so will your interest rate. If it decreases, your rate will, too.

Common ARM indexes include:

• Secured Overnight Refinancing Rate (SOFR)
• Constant Maturity Treasury (CMT)
• Cost of Funds Index (COFI)

Margin

The margin is the amount your lender adds to the index to determine your mortgage interest rate. The margin is essentially the lender's share of the profit. The margin is established up-front and doesn't change after closing. Both the index your lender bases your rate on and the margin can be found in your mortgage contract.

No matter the market conditions or the floor, your interest rate will never fall below the lender's margin.

Interest-rate caps and floors

Most ARMs have specific interest-rate caps and floors that limit how much your mortgage interest rate can change.

There are generally three types of caps:

• Initial rate cap. This represents how much the interest rate can change on the first adjustment.
• Subsequent rate cap. This represents how much the interest rate can change each adjustment after the first.
• Lifetime rate cap. Over the entire term of the loan, the rate won’t go up or down by more than this.

In our 7/6 ARM 2/1/5 example, the caps and floors are represented by the numbers 2/1/5. This means the initial rate cap is 2%, the subsequent rate cap is 1%, and the lifetime rate cap is 5%.

Term

Although it’s usually not included in the label, the most common loan term for an ARM is 30 years.

5/1 vs. 7/6 vs. 10/6 ARM: A quick comparison

The ARM reset schedule has a significant impact on your overall loan costs and how prepared you need to be for changes in your monthly payment.

How do these ARM reset schedules differ?

The two numbers in these different reset schedules refer to the initial fixed-rate period and the adjustment interval. Let's look at the details for each below.

5/1 ARM

A 5/1 ARM has a fixed-rate period that lasts 5 years. The rate adjusts annually after the fixed-rate period. This structure is more volatile and risky due to the short fixed term, but the monthly payment may be the lowest during the first 5 years. This is likely the most financially risky option among the three.

7/6 ARM

With a 7/6 ARM, the fixed-rate period lasts for 7 years, then it adjusts every 6 months.

This option offers less volatility than a 5/1 ARM due to the longer term. However, a shorter adjustment interval comes with more opportunities for the rate to increase. This is the “moderate” risk option financially among the three.

10/6 ARM

A 10/6 ARM has a fixed-rate for 10 years, after which the rate adjusts every 6 months.

The long fixed-rate term may mean a higher initial interest rate compared with the other options. This is likely the least financially risky option among the three.

What’s interesting about a 10-year ARM is that the average tenure of a homeowner before selling is 11 years. If you’re just a little ahead of the normal curve, you may find yourself getting ready to move before the payment adjusts. You could enjoy a slightly lower rate with none of the risk.

5/1 vs. 7/6 vs. 10/6 ARM: Example payment scenarios

Let's look at a hypothetical scenario where a borrower takes out a $350,000 ARM with a 30-year term and a 2/2/5 cap structure. The table below compares hypothetical payments and interest rates at the initial period and after two adjustments to keep things simple.

You can run your own scenarios to see how much adjustments affect your payment by using our mortgage calculator.

What to consider when choosing an ARM reset schedule

Choosing the right ARM structure requires assessing your needs. Consider the factors below when assessing ARM reset schedules:

• Your homeownership timeline, which affects the ideal fixed term
• Income stability (initially and over time), which affects payment affordability
• Interest rate environment (current and future)
• Risk tolerance
• Financial goals (such as refinancing the ARM)

We encourage you to learn how mortgage rates are determined, calculate the right percentage of income for a mortgage, and look for the best mortgage rates.

Which reset schedule fits your budget and needs?

Every home buyer has unique needs. Let’s look at the suitability of each reset schedule.

When to consider a 5/1 ARM

A 5/1 ARM may be the right choice for someone who:

• Is a first-time buyer buying a starter home
• Expects to relocate or otherwise has a short ownership horizon
• Expects to sell or refinance before the fixed period ends
• Has a higher risk tolerance for earlier rate changes
• Plans to aggressively make an additional principal payment to pay down the principal

When to consider a 7/6 ARM

A 7/6 ARM may be the right choice for someone who:

• Has a moderate homeownership timeline and knows how long they plan to live there before selling
• Is considering refinancing or selling at 7 years¹
• Can tolerate the risk of potential rate changes every 6 months
• Prefers payment stability without the higher rate for a 10/6 ARM, but understands why their mortgage payment could change

When to consider a 10/6 ARM

A 10/6 ARM may be the right choice for someone who:

• Has a long homeownership timeline
• Prefers to lock in a fixed rate and payment for as long as possible
• Has a sensitive budget where predictability is key
• Is willing to pay a higher interest rate than with the other two options
• Can tolerate potential rate changes every 6 months after 10 years, and may expect income growth in the long term

This can make it the best loan for buying a house when getting a mortgage with rising rates.

When to consider a fixed-rate mortgage instead

It may make sense to choose a fixed-rate mortgage instead of an ARM if you:

• Need long-term certainty for your budget
• Plan to live in the house beyond a decade
• Are concerned about rising interest rates
• Have certain long-term goals

You should weigh the pros and cons of an ARM vs. a fixed loan.

The bottom line: Take time to learn ARM term options

The reset schedule on your ARM plays a huge role in your financial future. Whether you choose a 5/1, 7/6, or 10/6 ARM depends on your risk tolerance and timeline. Review all available ARM term options, consider your homeownership plans and financial goals, and explore the impact on your budgets, interest costs, and stability.

Are you ready to make a move? You can apply for a mortgage with Rocket Mortgage today.

¹ Refinancing may increase finance charges over the life of the loan.

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