Quick answer
The biggest ARM risk is payment shock at the first reset. On a $350,000 7/6 ARM starting at an example 6.74%, Fannie Mae’s caps let the rate reach 11.74% in month 85, lifting principal and interest from $2,268 to $3,335 — 47% more in one step. Over 10 years the 7/6 costs less than a 30-year fixed at today’s average unless its rate after the reset ends up more than 1.85 percentage points above the start — about 8.59%. Lenders generally approve a 7/6 on its starting payment, and refinancing out depends on rates, your home’s value and your finances at the time.
Key facts
5years
Years of rate changes a Qualified Mortgage must underwrite
12 CFR 1026.43(e)(2)(iv) · Oct 29, 2026
7.24%
30-year fixed average used for comparison
Freddie Mac Primary Mortgage Market Survey · Week of Oct 29, 2026
Five risks, one example loan
The fixed vs adjustable-rate guide explains how an ARM works and runs a worst case on a 5/6 ARM. This post takes the other side: each risk, sized on one example. You buy a $400,000 home with a $350,000 30-year ARM. The start rate is an example 6.74%, half a point under today’s 7.24% 30-year fixed average, and we assume it equals the fully indexed rate today — no discount. Caps are Fannie Mae’s standard plans: 2/1/5 on a 5/6 ARM and 5/1/5 on a 7/6.
| Risk | What triggers it | How big it can get here | What limits it |
|---|---|---|---|
| Payment shock | The first reset | +47% on the 7/6 in one step | Rate caps |
| Rising index | The 30-day average SOFR goes up | Up to the lifetime cap | Periodic and lifetime caps |
| Margin | Set at closing, never changes | $49 a month per 0.25 point | Shopping; Fannie Mae’s 3% maximum |
| Refinance risk | Falling value, higher rates, weaker finances | No conventional refinance below a certain value | Equity and savings |
| Qualifying gap | Approval on the starting payment | Payment 47% above what you were approved on | Your own budget |
Payment shock: why a 7/6 can jump further at once
Longer fixed periods feel safer, and they are — for longer. But the caps are different. A 5/6 ARM’s first change is capped at 2 points, then 1 point every six months. A 7/6 ARM’s first change is capped at 5 points, the same as its lifetime cap, so the whole increase can arrive in a single reset.
| ARM | Starting payment | First reset | Payment after it | Highest payment |
|---|---|---|---|---|
| 5/6 ARM | $2,268 | Month 61: 8.74% | $2,699 (+19%) | $3,382 from month 79 |
| 7/6 ARM | $2,268 | Month 85: 11.74% | $3,335 (+47%) | $3,335 from month 85 |
The 5/6 climbs in steps and ends a little higher, because its increases start two years earlier on a larger balance. The 7/6 gives two more years at the starting payment, then delivers the full shock at once. Payments here are principal and interest only; taxes and insurance come on top.
A stress test across rate paths
The worst case is a boundary, not a forecast. The table shows what happens if the fully indexed rate is 1 point lower, unchanged or higher at the reset and stays there — and what each path means for total cost over 10 years against a 30-year fixed at 7.24%. “10-year cost” counts every payment plus the balance still owed at the end of year 10.
| Rate path at the reset | 7/6 rate from month 85 | 7/6 payment | 5/6 payment once caps allow | 7/6 10-year cost vs fixed |
|---|---|---|---|---|
| Rates fall 1 point | 5.74% | $2,076 | $2,065 | −$27,111 |
| Rates unchanged | 6.74% | $2,268 | $2,268 | −$17,634 |
| Rates rise 1 point | 7.74% | $2,468 | $2,479 | −$8,110 |
| Rates rise 2 points | 8.74% | $2,675 | $2,699 | +$1,451 |
| Rates rise 3 points | 9.74% | $2,889 | $2,923 | +$11,041 |
| Worst case (lifetime cap) | 11.74% | $3,335 | $3,382 | +$30,278 |
Over 10 years the 7/6 costs less than a 30-year fixed at today’s average unless its rate after the reset ends up more than 1.85 percentage points above the start — about 8.59%. If rates stay where they are, the ARM is $17,634 cheaper over the decade. If you are confident you will sell or pay off the loan before month 85, the reset never reaches you — but that is a plan about your life, not about rates.
How the 10-year cost is counted
| 30-year fixed at 7.24% | 7/6 ARM, rates unchanged | |
|---|---|---|
| Monthly principal and interest | $2,385 | $2,268 |
| Payments over 10 years plus balance owed | $588,247 | $570,613 |
| Difference | $17,634 less |
The index and the margin
After the fixed period, your rate is the index plus the margin, within the caps. On Fannie Mae ARMs the index is the 30-day average SOFR, which you can’t influence. The margin is set by your lender, printed in your note and never changes — and it is negotiable at the start.
Fannie Mae caps the margin at 3% above the index and doesn’t let the rate fall below the margin, so the margin is also your floor. Every quarter point of margin adds about $49 a month to the payment after the reset on the $317,705 balance left at month 84 — for the remaining 23 years. Compare margins between lenders as carefully as start rates.
Refinance risk: rates, value and your finances
The usual plan with an ARM is to refinance before the reset. The CFPB’s handbook is blunt about it: don’t count on being able to refinance, and you might not qualify if your home loses value. Three things all have to line up at once: rates low enough to make it worthwhile, enough equity, and income and credit that still qualify.
Equity is the easiest to measure. At the 7/6 reset you would still owe about $317,705 of the original $350,000:
| Home value change | Value | Loan-to-value | What it means for a conventional refinance |
|---|---|---|---|
| −20% | $320,000 | 99.3% | Above the conventional refinance limit |
| −10% | $360,000 | 88.3% | Refinance possible, with PMI |
| Unchanged | $400,000 | 79.4% | Refinance without PMI if you qualify |
| +10% | $440,000 | 72.2% | Refinance without PMI if you qualify |
A conventional rate-and-term refinance on a one-unit home generally tops out at 97% loan-to-value, and above 80% you would pay PMI on the new loan. If values fall and rates rise together, you may be stuck with the reset payment exactly when it is highest. Is refinancing worth it? covers what to weigh when a refinance is possible.
Qualifying: approved on one payment, owing another
Federal rules require lenders to check that you can repay, and for ARMs they look only a few years ahead. A general Qualified Mortgage must be underwritten at the highest rate that can apply in the first 5 years after the first payment. Fannie Mae applies a stricter rate to ARMs with a fixed period of 5 years or less, but a 7/6 or 10/6 ARM is generally qualified at its note rate.
| Loan | Fannie Mae qualifying rate | Rate | Qualifying payment | Worst-case payment | Worst case above qualifying |
|---|---|---|---|---|---|
| 5/6 ARM | Higher of start rate + first cap, or fully indexed rate | 8.74% | $2,751 | $3,382 | 23% |
| 7/6 ARM | Start (note) rate | 6.74% | $2,268 | $3,335 | 47% |
| 30-year fixed | Note rate | 7.24% | $2,385 | $2,385 | 0% |
The 5/6 ARM is the harder loan to qualify for, yet its worst case is closer to what you were approved on. The 7/6 is easier to get, and its worst case is the furthest from the approval. Before you rely on a 7/6 to stretch your budget, run the reset payment in the mortgage payment calculator with your taxes and insurance added.
Prepayment penalties and other features to check
Federal rules generally keep prepayment penalties off ARMs: a mortgage covered by the ability-to-repay rule may carry one only if its APR can’t rise after closing, it is a Qualified Mortgage and it isn’t a higher-priced loan. Even on a fixed-rate loan that meets those tests, the penalty is capped at 2% of the balance prepaid in the first two years and 1% in the third, and none is allowed after 3 years — at most $7,000 on $350,000.
So the ARM-specific question is less about penalties and more about structure. Check the Loan Estimate and note for:
- The caps — first, periodic and lifetime, and whether they work in both directions.
- The floor — the lowest the rate can go; on Fannie Mae ARMs, the margin.
- Interest-only or payment-option features — these can make the balance grow; neither is allowed on a Qualified Mortgage.
- A conversion option — some ARMs can switch to a fixed rate for a fee at set times.
How to stress-test your own ARM offer
Find the caps and margin
They are in the AIR table on page 2 of the Loan Estimate; the index is named there too.
Work out the worst-case payment
Start rate plus the first cap, on the balance you will owe at the first reset. Page 1 shows the maximum payment.
Test it against your budget
Add taxes, insurance and any HOA dues, and compare the total with your take-home pay.
Price the fixed alternative
Get a fixed-rate quote on the same day and compare 10-year costs under a few rate paths.
Check your refinance cushion
Estimate the loan-to-value at the reset if the home’s value falls 10%.
Keep a reserve
Savings for several months of the higher payment buy time if you can’t refinance.
Frequently asked questions
What is the biggest risk of an adjustable-rate mortgage?
Payment shock at the first reset. On our $350,000 example, a 7/6 ARM’s payment could rise from $2,268 to $3,335 in month 85 under Fannie Mae’s 5/1/5 caps — 47% in one step.
Is a 7/6 ARM safer than a 5/6 ARM?
It is safer for longer: the payment can’t change for seven years instead of five. But its first cap equals its lifetime cap, so the full increase can come at once, and lenders generally qualify it at the starting rate rather than a higher one.
Can my ARM rate go down?
Yes. After the fixed period it follows the 30-day average SOFR plus your margin, within the caps. On Fannie Mae ARMs it can never fall below the margin, which can be up to 3% above the index.
Will I be able to refinance before my ARM resets?
Only if you qualify at the time. In our example you would owe about $317,705 at the 7/6 reset; if the home’s value fell 20%, the loan-to-value would be 99.3%, above the 97% limit for a conventional refinance. The CFPB advises not to count on refinancing.
Do ARMs have prepayment penalties?
Generally not. Under the federal ability-to-repay rule, a covered mortgage can include a prepayment penalty only if its APR cannot increase after closing, among other conditions — which rules out ARMs.
How do lenders qualify me for an ARM?
A general Qualified Mortgage is underwritten at the highest rate possible in the first 5 years after the first payment. Fannie Mae uses a higher rate for ARMs with a fixed period of 5 years or less; longer ARMs are generally qualified at the note rate.
How much does the margin matter?
A lot, because it lasts for the rest of the loan. In our example each 0.25 point of margin adds about $49 a month after the reset. Compare margins, not only start rates.
Sources
- Freddie Mac Primary Mortgage Market Survey — 30-year fixed rate, national weekly average (Week of Oct 29, 2026)
- Fannie Mae Standard ARM Plan Matrix — Rate caps on a Fannie Mae 5/6 ARM (first/periodic/lifetime); Rate caps on Fannie Mae 7/6 and 10/6 ARMs (first/periodic/lifetime) (Oct 1, 2021)
- Fannie Mae Selling Guide B2-1.4-02 — Fannie Mae ARMs: highest margin allowed (percentage points over the index); the rate can never fall below the margin; Index on Fannie Mae ARMs (Dec 10, 2025)
- Fannie Mae Eligibility Matrix — Fannie Mae limited cash-out refinance maximum LTV, one-unit principal residence (fixed rate) (Apr 1, 2026)
- 12 CFR 1026.43(g) — Maximum prepayment penalty in the first two years (share of balance prepaid); General Qualified Mortgage: an ARM is underwritten at the highest rate that may apply during this many years after the first payment is due; Maximum prepayment penalty in the third year (share of balance prepaid) (Oct 28, 2026)
- Fannie Mae Selling Guide B3-6-04 — Fannie Mae: ARMs with an initial fixed period this long or shorter must qualify at a higher rate (Feb 7, 2024)
- CFPB: Consumer Handbook on Adjustable-Rate Mortgages (CHARM)
Last reviewed Figures are checked against the sources above. Read our editorial policy. This page is general information, not financial advice — see the disclaimer.