Adjustable-Rate Mortgages (ARMs) in Michigan
An adjustable-rate mortgage (ARM) is a home loan whose rate is fixed for the first 5, 7 or 10 years and then adjusts every six months for the rest of the term. In exchange for that future uncertainty, the starting rate is usually lower than a comparable fixed-rate mortgage. The question that decides it is not “will rates rise?” but “will I still have this loan when the fixed period ends?” If you can honestly answer no, an ARM can save real money. If you can’t, the caps below are the numbers to plan around.
How an ARM sets your rate
During the fixed period, an ARM behaves exactly like a fixed-rate loan. After it ends, each adjustment uses the same formula:
New rate = index + margin, limited by your caps.
- Index: a published market rate. Conforming ARMs (the kind Fannie Mae buys) use the 30-day average of SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York. SOFR replaced LIBOR.
- Margin: a fixed spread written into your note at closing. It never changes, and on a conforming ARM it can be no more than 3 percentage points. It is also your floor: the rate can never drop below it.
- Caps: contractual limits on how far the rate can move, set by the ARM plan.
The caps, plan by plan
Conforming ARMs follow Fannie Mae’s standard plans. The caps are not the same for every fixed period, and the difference matters:
| ARM | First adjustment | Later adjustments | Lifetime cap |
|---|---|---|---|
| 5/6 | 2 points | 1 point each | 5 points over start |
| 7/6 | 5 points | 1 point each | 5 points over start |
| 10/6 | 5 points | 1 point each | 5 points over start |
Read the 7/6 and 10/6 rows carefully: their first adjustment can use the entire lifetime cap at once. The longer fixed period buys you more certain years; in exchange, the first reset is limited only by the lifetime cap.
That lifetime cap is the number to test your own budget against. Take any starting rate, add 5 points, and ask whether you could make that payment. Put that capped rate into our mortgage calculator to see it.
Jumbo and portfolio ARMs are not bound by Fannie Mae’s plans and can use other indexes, caps or adjustment schedules, including the older once-a-year 5/1 and 7/1 structures. Whatever the loan, page 2 of your Loan Estimate has an Adjustable Interest Rate (AIR) table listing the index, margin, first and later change limits, and the maximum rate. Ask for it before you compare quotes.
Who qualifies
ARM eligibility follows the program underneath it. Most ARMs are conventional loans, and above the 2026 conforming limit of $832,750 for a one-unit home they are jumbo loans, where ARMs are common. Down payment, credit and debt-to-income rules come from that program, not from the ARM itself.
The ARM-specific rule is the qualifying rate, and it is worth knowing because it differs by fixed period. Under Fannie Mae’s guidelines:
- 5-year ARMs (5/6): you qualify at the higher of your start rate plus 2 points (the first-adjustment cap) or the fully indexed rate (today’s index plus your margin).
- 7- and 10-year ARMs (7/6, 10/6): you qualify at no less than the note rate, which is the lower starting rate. (Higher-priced loans use the higher of the note rate or the fully indexed rate.)
That means a 7/6 or 10/6 can let you qualify for more than a fixed-rate loan would. That is exactly when the cap table above deserves the most attention: qualifying at the start rate says nothing about whether you can carry the payment after the first adjustment.
What it costs
- The starting rate. Typically lower than a comparable fixed rate, and that gap is the entire case for an ARM. It varies with the market. When it narrows to almost nothing, you are taking adjustment risk for very little reward.
- After the fixed period. The rate follows the index, within the caps. It can rise; it can also fall, down to the margin. Nobody, including your lender, knows which.
- Closing costs. Built the same way as on a fixed-rate loan; your Loan Estimate itemizes them.
- No prepayment penalty on a home you live in, so selling or refinancing during the fixed period costs nothing extra.
A Michigan note on ARMs and down payment assistance
If you plan to use MSHDA’s down payment assistance, an ARM is off the table: every MSHDA MI Home Loan first mortgage is a fixed-rate loan, and the MI 10K DPA pairs only with one of those. See down payment assistance for how that program works.
Pros and cons
Pros:
- Lower starting rate than a comparable fixed-rate loan, which means real monthly savings during the fixed period
- If you sell or refinance before the first adjustment, you keep the savings and never carry the risk
- Hard caps put a contractual ceiling on the worst case
- The rate can adjust down as well as up
- No prepayment penalty on a primary residence
Cons:
- Payment uncertainty after the fixed period: the honest worst case is your start rate plus 5 points
- On a 7/6 or 10/6, that worst case can arrive at the very first adjustment
- The exit plan (sell or refinance) depends on future rates, home values and your qualification at the time
- The starting-rate advantage varies and is sometimes too small to justify the risk
ARM vs. fixed-rate: decide on your timeline
- Confident you’ll move or pay off within the fixed period (military orders, a medical residency, a planned relocation, a bridge situation): the ARM’s lower rate is money saved with little realized risk.
- Might stay indefinitely: take the fixed-rate mortgage. The premium for certainty is small next to the cost of guessing wrong.
- In between: compare the total savings over the fixed period against the payment at the lifetime cap. Our fixed vs. adjustable guide walks through the three questions that settle it.
If your fixed period is ending and you want stability, a rate-and-term refinance into a fixed rate is the standard exit. If you plan to sell instead, note that a conforming ARM can’t be assumed by your buyer during its fixed period; our assumable mortgage guide covers the loans that can.
Getting started with Priority Home Mortgage
Priority Home Mortgage is a direct lender based in Grand Rapids, Michigan. If another lender has put an ARM in front of you, send it over: we will read you the caps, the margin and the payment at the lifetime cap, and put a fixed-rate quote next to it, so the structure you sign fits your plans. Start with our quick quote form and we’ll run your scenario both ways.
Guides on this topic
Adjustable-Rate Mortgages (ARMs) in Michigan: your questions, answered
What do the numbers in '7/6 ARM' mean?
The first number is how many years the starting rate is fixed: seven. The second is how often it adjusts after that, in months: every six. Older loans adjusted once a year and were written 5/1 or 7/1; conforming ARMs sold to Fannie Mae today adjust every six months, so 5/6, 7/6 and 10/6 are the names you will see on most quotes.
How high can my ARM rate actually go?
On a conforming ARM, never more than 5 percentage points above your starting rate, for the life of the loan. How fast it can get there depends on the plan. A 5/6 ARM can move at most 2 points at its first adjustment. A 7/6 or 10/6 can move the full 5 points at its first adjustment. After that, every plan moves at most 1 point per six-month adjustment. Your Loan Estimate shows your exact caps in its Adjustable Interest Rate (AIR) table.
Can my rate go down when the ARM adjusts?
Yes. Each adjustment is the index plus your margin, so if the index has fallen, your rate falls too, limited by the same per-adjustment caps. It cannot fall below the margin itself, which is the floor on a conforming ARM. Budget for the upward case, not the downward one.
What happens at the end of the fixed period if I haven't sold or refinanced?
Nothing dramatic: the loan simply starts adjusting on schedule and you keep making payments at the new rate. Many borrowers plan to refinance into a fixed rate before the first adjustment. That depends on rates, your home's value and your qualification at the time, so treat it as an option, not a plan you can count on.
Do ARMs have prepayment penalties?
Not on a home you live in. Federal ability-to-repay rules allow a prepayment penalty only on a loan whose rate cannot increase, so an ARM on your primary residence can be sold or refinanced at any point without one.
Can a buyer take over my ARM when I sell?
Fannie Mae's standard 5/6, 7/6 and 10/6 plans are due on sale during the fixed period and assumable after it, with a buyer who qualifies. So an ARM generally cannot be handed to a buyer in its early years. Our assumable mortgage guide covers which loans can be.
Are today's ARMs the same loans that caused problems in 2008?
No. The pre-2008 era featured teaser rates, interest-only periods, negative amortization, and loans approved without checking whether the borrower could afford the adjustments. Today's conforming ARMs fully amortize, carry hard caps, and are underwritten under federal ability-to-repay rules.