How a 5/6 ARM works
A 5/6 ARM is a type of adjustable-rate mortgage (ARM). The way it works is right in the name:
- “5” — Your interest rate stays fixed for the first five years
- “6” — After that, it can adjust once every six months for the rest of the loan term
During those first five years, your interest rate stays stable, much like a fixed-rate mortgage. But after that, the interest rate is tied to a market index (such as the Secured Overnight Financing Rate, or SOFR) plus a margin set by your lender. Once every six months, your interest rate can move up or down according to the index—and with it, your monthly payment.
PRO TIP:
The market index changes with the economy, so it can go up or down. The margin is a set rate added by your lender that doesn’t change. Together, they determine your mortgage rate. Keep an eye on both the index and margin to help predict your future payments.
Initial fixed-rate period
For the first five years, you get predictability and consistency. This is often the sweet spot for buyers who plan to sell or refinance before the first adjustment kicks in.
Adjustment period
Once the fixed period ends, your rate adjusts every six months. The new rate is calculated using a benchmark index combined with a lender margin. If market rates rise, your monthly payment may increase. If they fall, you could pay less.
Rate caps
Because predictability matters, ARMs come with built-in protections called rate caps, which limit how much your rate can change. There are three kinds to know:
- Initial adjustment cap: Limits how much your rate can rise after the fixed period ends (often around 2%)
- Annual adjustment cap: Limits increases in any single year (commonly 2%)
- Lifetime cap: Limits how much your rate can ever rise over the life of the loan (often 5%).
These caps prevent sudden, dramatic jumps in the size of payments, which can help you plan ahead even in a changing rate environment.
Why the initial rate is usually lower
A 5/6 ARM typically starts with a lower interest rate than a 30-year fixed mortgage. That’s because the lender shares some of the risk with you, and you get a discount upfront in exchange for taking on possible rate changes later.
For many buyers, that tradeoff is worthwhile. Lower early payments can make it easier to:
- Qualify for a home you love
- Manage cash flow in the early years of owning a home
- Save up for other needs
Who might benefit from a 5/6 ARM?
A 5/6 ARM isn’t for everyone, but it can be a smart fit for certain financial goals or timelines. You might consider one if you:
- Plan to sell your home within five to seven years: If you’ll move before the first rate adjustment, you can enjoy the lower fixed period without facing rate changes.
- Expect your income to grow: If you’re early in your career or anticipate higher earnings soon, you may be more comfortable with future rate adjustments.
- Plan to refinance: Many homeowners refinance to a fixed-rate mortgage before their interest rate changes.
- Are comfortable with some uncertainty: Adjustable rates mean flexibility and some variability. If you’re financially prepared, that flexibility can be an advantage.
5/6 ARM vs. fixed-rate mortgage
Let’s take a look at some key differences between ARMs and fixed-rate mortgages.
| Feature | 5/6 ARM | Fixed-Rate Mortgage |
|---|---|---|
Initial interest rate | Typically lower | Typically higher |
Interest rate changes | After year five, adjusted every six months | Never |
Best for | Short-term homeowners or refinancers | Long-term homeowners |
Budgeting | Less predictable long-term | Stable and consistent |
Flexibility | More flexible early on | Locked in over time |
