5/1 ARM vs 30-year fixed (US): the 5-year break-even math
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By Editorial team
A $450,000 home purchase with 20% down (a $360,000 loan), comparing a 30-year fixed rate at 6.75% against a 5/1 ARM at 5.90%, saves the ARM borrower $200/month - or $12,000 over the first five years. But if the ARM adjusts to 7.90% at year six, the ARM payment surpasses the fixed payment by $226/month, erasing those five years of savings in roughly 53 months. This is for US buyers weighing near-term savings against long-term rate risk.
The scenario modeled
Both loans share the same property price, down payment, and loan amount. The fixed rate holds for the full 30-year term. The ARM rate holds for 5 years, then adjusts annually to a hypothetical worst-case of 7.90% (the start rate plus a 2% first-adjustment cap). Calculations use standard US monthly compounding.
| Input | Mortgage A - 30yr Fixed | Mortgage B - 5/1 ARM |
|---|---|---|
| Purchase price | $450,000 | $450,000 |
| Down payment | $90,000 (20%) | $90,000 (20%) |
| Loan amount | $360,000 | $360,000 |
| Initial rate | 6.75% (fixed forever) | 5.90% (fixed 5 yrs) |
| Adjustment after yr 5 | - | Annual, up to ±2%/yr |
| Rate cap (lifetime) | - | +5% from start (10.90%) |
| Loan term | 30 years | 30 years |
The findings
During the 5-year ARM introductory period, the ARM borrower pays $200/month less and saves $15,400 in interest compared to the fixed-rate borrower. Both are paying down slightly different amounts of principal each month (the ARM actually retires slightly more, because a larger share of the lower payment is principal at the lower rate).
If the ARM adjusts to 7.90% at month 61, the new monthly payment on the remaining ~$334,600 balance climbs to roughly $2,561 - $226 more than the fixed borrower's unchanged $2,335. At that rate of reversal, the ARM borrower burns through their $12,000 in accumulated savings in roughly 53 months, reaching break-even around year 10.
| 30yr Fixed | 5/1 ARM (initial) | Difference | |
|---|---|---|---|
| Monthly payment (yrs 1-5) | $2,335 | $2,135 | $200/month less on ARM |
| Interest over first 5 years | $118,100 | $102,700 | $15,400 less on ARM |
| Total paid over first 5 years | $140,100 | $128,100 | $12,000 less on ARM |
| Monthly payment if ARM → 7.90% | $2,335 | $2,561 | $226/month MORE on ARM |
| Break-even after adjustment | - | ~53 months | ARM trails after ~yr 9.5 |
US context
According to Freddie Mac's Primary Mortgage Market Survey, the average 30-year fixed rate peaked above 7.79% in October 2023 - a 23-year high - before declining into the 6.5-7% range through 2025 and into 2026. The 5/1 ARM spread versus the 30-year fixed has varied widely: from near parity in low-rate periods to 80-120 basis points during high-rate environments. The current spread makes the ARM worth considering for buyers who plan to move or refinance within seven years.
Source: Freddie Mac, "Primary Mortgage Market Survey," accessed April 2026. URL: https://www.freddiemac.com/pmms
When this comparison applies - and when it doesn't
The ARM makes sense when: You have a firm plan to sell or refinance within 5-7 years - a typical first home before upsizing, a relocation purchase, or a buy-and-hold investment property with a defined exit. The $12,000 in first-5-year savings is real and predictable in those scenarios. It also makes sense if you genuinely expect rates to fall before year 6, allowing a refinance before the first adjustment.
The fixed rate makes sense when: You plan to stay in the home for 10 or more years, your income is not expected to grow significantly, or your budget cannot absorb a $200+ payment jump in year 6. Payment certainty is particularly valuable for single-income households and buyers at the top of their qualification range.
This model does not reflect: Interest-only ARM periods, jumbo loan pricing, or ARMs with caps other than the 5/2/5 structure modeled. Always request the specific cap structure in writing from your lender before modeling your own break-even.
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Frequently asked questions
- What happens to my ARM payment when the introductory period ends?
- After the fixed period (5 years on a 5/1 ARM), the rate adjusts annually based on a benchmark index - typically the Secured Overnight Financing Rate (SOFR) - plus a fixed margin. Each adjustment is subject to periodic caps (commonly ±2% per year) and a lifetime cap (typically ±5-6% from the start rate). If rates have risen, your payment rises; if they have fallen, your payment drops.
- What is a rate cap on an adjustable-rate mortgage?
- Rate caps limit how much your ARM rate can change. A 5/2/5 cap structure means: the first adjustment cannot exceed 5% above the initial rate, subsequent annual adjustments cannot exceed 2%, and the rate can never exceed 5% above the start rate over the life of the loan. Caps protect you from runaway payments but do not prevent meaningful increases.
- How do I calculate the break-even point between a fixed rate and an ARM?
- Divide the ARM's total savings during the fixed period by the monthly amount by which the ARM payment exceeds the fixed payment once it adjusts. For example, if the ARM saves $12,000 over 5 years and then costs $226/month more, the break-even is roughly 53 months (about 4.4 years) after the adjustment. If you plan to sell or refinance before that point, the ARM wins.
- Is a 5/1 ARM a good idea in a high-interest-rate environment?
- It depends on your timeline. If rates are high and widely expected to fall before the ARM adjusts, a 5/1 ARM can offer both a lower initial payment and a future rate decrease. The risk is that rates stay elevated or rise further. The 5-year fixed period gives you meaningful protection, but you are betting that your situation - income, home ownership, refinancing access - will be flexible in year 6.