What Is a Bad ARM, a Good ARM, and How Can They Help or Hurt Me?

My name’s Evan Kaufman, your VA loan originator—here to help explain.

We’re talking about Adjustable Rate Mortgages, otherwise referred to as ARMs.

Here’s how we’ll break it down:

1. Old ARMs vs. New ARMs

2. ARMs vs. Fixed-Rate Mortgages

3. The pros, the cons, and how to evaluate if an ARM is right for you

Old ARMs vs. New ARMs vs. Fixed Mortgages

Most people these days—and in recent years—have used fixed-rate mortgages.
You’ve likely heard of the 30-year fixed—that’s the most common—followed by the 15-year fixed.

With a fixed mortgage:

Your interest rate stays the same for the entire term.
It’s simple, reliable, and still the most common type of mortgage today.

So, What’s an ARM?

An ARM, or Adjustable Rate Mortgage, is just that:

A rate that can change—it adjusts over time.

But let’s be honest—when some people hear “ARM,” it triggers memories of pre-2008, when they were scary.

Old ARMs (Pre-2008):

• Unregulated

• High risk

• Interest rates could jump significantly in just 1–3 years

• A major contributor to the 2008 housing crash

New ARMs (Post-2008):

Today’s ARMs are very different. They are:

• Highly regulated

• Equipped with caps and predictability

• Much safer for borrowers

Let’s dive into how they work and how to analyze them.

How to Read ARM Numbers (e.g., 5/1/1/5 or “5/1 ARM”)

You’ll often see ARMs represented by three or four numbers. Let’s take 5/1/1/5 as an example:

1. First number (5):
   How many years your rate is fixed. In this case, 5 years.

2. Second number (1):
   How many times your rate can adjust per year after the fixed period.

3. Third number (1):
   The maximum amount the rate can increase or decrease in one year.

4. Fourth number (5):
   The maximum amount your interest rate can increase over the life of the loan.

Example: 5/1/1/5 ARM

• Fixed at 5.5% for the first 5 years

• After year 5, it can adjust once per year

• The rate can go up or down by no more than 1% per year

• The rate can never increase more than 5% total, meaning a max of 10.5%

If rates skyrocket to 15% in 10 years, you’re still capped at 10.5%.

If rates drop to 4%, your rate could adjust down to 4.5%—but no more than that 1% per year.

Why ARMs Haven’t Made Sense (Until Recently)

Over the last 15 years, ARMs often didn’t make sense because:

1. Interest rates were at historical lows — Why risk an ARM when you could lock in 3–4% for 30 years?

2. We had an inverted yield curve — Short-term loans actually cost more than long-term ones.

This meant that ARM rates were often higher than fixed rates, making fixed the easy choice.

What’s Changed?

Two big things:

1. Rates have gone up — We’re no longer at those record lows.

2. The yield curve is normalizing — ARM rates are now more competitive.

Today, ARMs can be 0.5% or more lower than fixed-rate options.

So, When Might an ARM Make Sense?

Ask Yourself These 4 Questions:

1. How Long Will I Keep This Home?

If the ARM is a 5/1, and you know you’ll sell or refinance in 4–5 years, you’ll never even reach the adjustment period.

Military? Short-term assignment?
Not planning to keep the home long-term?

Then an ARM might be a smart choice.

2. What Direction Do I Think Rates Are Going?

If you believe rates will:

• Go down → an ARM might allow you to ride that drop.

• Go up → then you’ll want to lock in while you can.

Today, rates are higher than recent history, but still below long-term historical averages.
So if we face economic slowdowns, we may see rates drop—and ARMs might allow you to benefit without refinancing.

3. What’s My Risk Tolerance?

I like to call this your “roll the dice” factor.

• Risk-averse? You may want the peace of mind of a fixed mortgage.

• Willing to take a calculated gamble? An ARM could pay off—especially with a clear short-term exit strategy.

Remember, new ARMs are not the dangerous products of 2008.
But they still require careful analysis.

4. What’s the Rate Spread?

• If the ARM rate is higher than the fixed rate → skip the ARM.

• If it’s ~0.5% lower or more → strongly consider it.

• Even 0.25% lower could be worth it if you’re certain about moving or refinancing before the adjustment.

In Summary

When comparing ARMs vs. fixed-rate mortgages, here’s what to evaluate:

• Do you plan to sell or refinance before the adjustment period?

• What’s your comfort level with rate adjustments?

• Is the ARM rate lower enough to justify the risk?

• Where do you think rates are headed?

My name’s Evan Kaufman, and I hope this helped you better understand the good, the bad, and the strategic use of ARMs.

Take care!