ARM vs. Fixed-Rate Mortgage 2026: Which Saves You More?
With rates expected to drop, ARMs are making a comeback. Current 5/1 ARM: 5.75% vs. 30-year fixed: 6.75%. That 1.00% gap saves $210/month ($75,600 over 30 years) on a $350K loan. But is the risk worth it? We break down every scenario — updated with February 2026 rate data.
ARM vs. Fixed Rates: February 2026
| Loan Type | Current Rate | Monthly P&I ($350K) | Fixed Period | Rate Savings vs. 30-Yr Fixed |
|---|---|---|---|---|
| 30-Year Fixed | 6.10% | $2,124 | 30 years (forever) | — (baseline) |
| 15-Year Fixed | 5.45% | $2,862 | 15 years (forever) | -0.65% |
| 7/1 ARM | 5.60% | $2,009 | 7 years fixed | -0.50% ($115/mo saved) |
| 5/1 ARM | 5.75% | $2,043 | 5 years fixed | -0.35% ($81/mo saved) |
| 5/6 ARM | 5.65% | $2,020 | 5 years fixed | -0.45% ($104/mo saved) |
| 10/1 ARM | 5.85% | $2,066 | 10 years fixed | -0.25% ($58/mo saved) |
ARM = Adjustable-Rate Mortgage. "5/1" means fixed for 5 years, then adjusts every 1 year. "5/6" means fixed for 5 years, adjusts every 6 months.
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How ARMs Work: The Complete Breakdown
Phase 1: Fixed Period (Years 1-5 or 1-7)
Your rate is locked and guaranteed — just like a fixed-rate mortgage. This is the "teaser" period where you get the lower rate. A 5/1 ARM at 5.75% means you pay 5.75% for the first 5 years, no matter what happens to the market.
Phase 2: Adjustment Period (After Fixed Period)
After the fixed period, your rate adjusts based on an index + margin. The most common index is SOFR (Secured Overnight Financing Rate). Typical margin: 2.75%.
Rate Caps: Your Protection
Every ARM has caps that limit how much your rate can increase:
| Cap Type | Typical Limit | What It Means |
|---|---|---|
| Initial adjustment cap | 2% | Max increase at first adjustment (5.75% → 7.75% max) |
| Periodic cap | 2% | Max increase per adjustment period after first |
| Lifetime cap | 5% | Max increase ever (5.75% → 10.75% absolute worst case) |
5/1 ARM vs. 30-Year Fixed: 3 Scenarios
Best Case: Rates Drop (ARM Wins Big)
If the Fed cuts rates as expected and SOFR drops to 2.50% by 2031:
Base Case: Rates Stay Flat (ARM Still Wins)
If SOFR stays around 3.50% (current level):
Worst Case: Rates Spike (Fixed Wins)
If inflation returns and SOFR jumps to 6.00%:
Decision Guide: ARM or Fixed?
Choose an ARM If...
- ✓ You'll sell or refinance within 5-7 years
- ✓ You expect rates to drop (Fed cutting cycle)
- ✓ You want the lowest possible payment now
- ✓ You're buying a starter home (will upgrade later)
- ✓ You have strong income growth expected
- ✓ You can handle payment increases if rates rise
- ✓ You're comfortable with financial complexity
Best ARM choice in 2026: 7/1 ARM (5.60%) — 7 years of protection with the biggest rate discount.
Choose Fixed If...
- ✓ You plan to stay 10+ years (forever home)
- ✓ You want payment certainty and peace of mind
- ✓ You're on a tight budget with no room for increases
- ✓ You're risk-averse or worry about rate changes
- ✓ You're buying your forever home
- ✓ Current fixed rates are already historically reasonable
- ✓ You don't want to think about your mortgage ever again
Best fixed choice in 2026: 30-year at 6.10% — lock it in and refinance if rates drop to 5% range.
ARM Types Compared: 3/1, 5/1, 5/6, 7/1, 10/1
| ARM Type | Fixed Period | Adjusts Every | Current Rate | Best For | Risk Level |
|---|---|---|---|---|---|
| 3/1 ARM | 3 years | 1 year | 5.50% | Flippers, short-term | HIGH |
| 5/1 ARM | 5 years | 1 year | 5.75% | Starter home buyers | MEDIUM |
| 5/6 ARM | 5 years | 6 months | 5.65% | Rate drop believers | MEDIUM |
| 7/1 ARM | 7 years | 1 year | 5.60% | Best balance of savings + safety | LOW-MED |
| 10/1 ARM | 10 years | 1 year | 5.85% | Long-term with some savings | LOW |
Pro Strategy: ARM + Refinance Combo
The smartest play in a falling-rate environment: Take a 7/1 ARM now, then refinance to a fixed rate when rates drop to the mid-5% range (expected 2027-2028).
ARM Worst-Case Payment Shock: Can You Handle It?
| Loan Amount | ARM Rate (Fixed Period) | Monthly (Fixed) | Worst Case Rate (+5% cap) | Worst Case Monthly | Payment Increase |
|---|---|---|---|---|---|
| $250,000 | 5.75% | $1,459 | 10.75% | $2,380 | +$921 (+63%) |
| $350,000 | 5.75% | $2,043 | 10.75% | $3,330 | +$1,287 (+63%) |
| $500,000 | 5.75% | $2,918 | 10.75% | $4,757 | +$1,839 (+63%) |
The stress test: Before choosing an ARM, ask yourself: "Can I afford the worst-case payment?" If a 63% payment increase would cause financial stress, choose fixed. If you have strong income, savings, or plan to sell/refi before adjustment, the ARM risk is manageable.
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Related Resources
Editorial Note: ARM rates from Freddie Mac PMMS and Bankrate surveys. SOFR data from Federal Reserve Bank of New York. Rate caps from CFPB ARM disclosure requirements. Updated Feb 13, 2026. Editorial standards.