Adjustable-rate mortgages start with lower rates than fixed loans—typically 0.5-0.75% less. On a $700,000 California loan, that means $350+ monthly savings during your initial fixed period.
But ARMs come with a catch: after 5, 7, or 10 years, your rate starts adjusting annually. Smart for some buyers, risky for others.
ARM structure basics
Every ARM has two phases:
Initial fixed term: Your rate stays locked (5, 7, or 10 years)
Adjustment phase: Rate changes yearly based on market conditions
Take a 5/1 ARM:
- Years 1-5: Rate fixed at 5.5%
- Year 6+: Adjusts annually
- New rate = Market index + lender's margin (usually 2.5%)
Current California ARM rates (March 2026)
5/1 ARM: 5.5-5.75%
- Fixed for 5 years, adjusts after
- Best discount vs. 30-year fixed
- Right if you're moving within 5 years
7/1 ARM: 5.75-6.0%
- Fixed for 7 years
- Moderate discount
- Good for medium-term ownership
10/1 ARM: 6.0-6.25%
- Fixed for 10 years
- Smallest discount
- Nearly matches fixed rates
How rate adjustments work
After your fixed period ends, your rate recalculates every year:
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New rate = Index (like SOFR) + Margin
Example:
- SOFR index at 4.5%
- Lender margin of 2.5%
- Your new rate: 7.0%
This continues annually for the rest of your 30-year loan.
Rate caps limit increases
Three cap types protect you:
Initial cap: Max increase at first adjustment (usually 2-5%)
Periodic cap: Max yearly increase (usually 2%)
Lifetime cap: Max total increase (usually 5%)
Example with 5/2/5 caps on 5.75% start rate:
- First adjustment: Max 10.75%
- Each year after: Max 2% more per year
- Absolute ceiling: 10.75%
Always calculate worst-case payments before choosing an ARM.
When ARMs save money
$600,000 loan example:
- Fixed at 6.5%: $3,792/month
- 5/1 ARM at 5.75%: $3,499/month
- Monthly savings: $293
- 5-year savings: $17,580
If you sell or refinance in year 4, you keep the full $17,580.
Best ARM candidates
You know you're moving: Job transfer, military, planned relocation—definite exit within 5-7 years.
Income is rising: Promotions expected, business growing—future rate increases won't strain your budget.
Jumbo borrowers: On $1.5M+ loans, ARM savings exceed $500/month.
Refinance plan: Rates may drop in 3-5 years, letting you refi to fixed before adjustments hit.
When to avoid ARMs
Tight budget: If you barely qualify at the ARM payment, any increase becomes unaffordable.
No exit plan: Hoping isn't a strategy. You need a concrete reason you won't be exposed to adjustments.
Long-term home: Planning to stay 15+ years? You'll face multiple adjustments.
Rising rate environment: When rates trend up, your adjustments will hurt.
Fixed income: Retirees can't easily absorb payment increases.
Real numbers: $800,000 Bay Area purchase
30-year fixed at 6.5%:
- Payment: $5,056/month
- 5-year total: $303,360
5/1 ARM at 5.75%:
- Payment: $4,665/month
- 5-year total: $279,900
- Savings: $23,460
7/1 ARM at 6.0%:
- Payment: $4,795/month
- 5-year total: $287,700
- Savings: $15,660
Shorter fixed terms = bigger savings if you exit on time.
California ARM lenders
Most banks offer ARMs, especially for jumbo loans where savings are substantial.
Widely available: Conventional loans, conforming and jumbo
Less common: Investment properties usually use fixed-rate products
No longer available: FHA discontinued ARMs in 2012
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ARM-to-fixed refinance strategy
Some buyers use ARMs tactically:
- Take 7/1 ARM, save money for 5-7 years
- Monitor rates during that period
- Refinance to fixed if rates drop
- If rates stay high, sell before adjustment
This works if you qualify for future refinancing and stay proactive.
Example: San Diego professional
Situation:
- $900K home purchase
- $720K loan (20% down)
- Company move guaranteed in 4 years
- 5/1 ARM at 5.5% vs. fixed at 6.25%
Result:
- Monthly savings: $400
- 4-year total: $19,200
- Sold on schedule, never faced adjustment
Clear timeline made the ARM a safe money-saver.
Common questions
Can I convert my ARM to fixed without refinancing?
No. You'll need a new loan with new closing costs and qualification.
What if rates spike when my term ends?
Payment increases, but caps limit the damage. Model worst-case scenarios first.
Do ARMs have prepayment penalties?
No. You can pay extra principal or pay off early.
Should I take a 5/1 ARM if I might stay 8 years?
No. Match your ARM term to your actual timeline, or choose fixed.
Bottom line
ARMs reward buyers with definite exit strategies. If you're moving in 5 years, the savings are real. If you're guessing or hoping, stick with fixed.
See current California mortgage rates for ARM pricing on your loan amount.
Ready to compare ARM vs. fixed for your situation? Get A Quote.
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