Fixed vs ARM: I Modeled the Worst Case to the Last Payment
By De Van Do -- June 30, 2026 -- 9 min read
The Comparison Everyone Stops Halfway Through
Every fixed versus adjustable explanation I have read covers the same ground. An ARM starts lower. It adjusts later. It has caps that limit how far it can move. Consider your time horizon.
All true, and all of it stops exactly where the interesting part begins, because nobody runs the schedule to the end. The caps get mentioned as a reassurance rather than modeled as an outcome.
So I put both loans into the amortization visualizer, took the ARM all the way to its ceiling using standard caps, and ran it to the final payment.
The teaser savings are real and they are smaller than I expected. The downside is real and it is much larger than the word caps suggests. Both halves are worth seeing in dollars rather than adjectives.
The Two Loans
A $400,000 loan over 30 years, the canonical example on this site, in two versions.
The fixed loan is 7% for the entire term. The payment is about $2,661 a month and the lifetime interest is about $558,036.
The ARM is a 5/1 starting at 6.25%, meaning the rate is fixed for five years and then adjusts once a year. I used the most common cap structure, usually written 2/2/5: a maximum 2 percentage point move at the first adjustment, a maximum 2 points at each adjustment after that, and a lifetime ceiling 5 points above the starting rate.
So the worst case path is 6.25% for five years, then 8.25%, then 10.25%, then 11.25% where it hits the lifetime ceiling and stops.
That is the worst case, not the expected case, and I want to be explicit about that. Rates could fall and the ARM could adjust downward. But the caps define the room the contract actually gives the lender, and that room is the thing you are agreeing to.
What the Teaser Years Are Worth
The ARM payment at 6.25% is about $2,463 a month, against $2,661 on the fixed loan. That is $198 a month less.
Over the full five fixed years, the ARM borrower keeps about $11,900 that the fixed borrower handed to the lender.
Eleven thousand nine hundred dollars is real money and I do not want to wave it away. On a first home it is a kitchen, or five years of a slightly less stressful budget.
There is a second, smaller benefit that rarely gets mentioned. Because more of the lower payment goes to principal, the ARM balance falls slightly faster. After 60 payments the ARM balance is about $373,349 against $376,526 on the fixed loan. About $3,177 of extra equity, which is modest but real.
So after five years the ARM borrower is ahead by roughly $15,000 all in. That is the entire case for the ARM, and it is a decent one, provided the story ends there.
The First Reset Erases It in 42 Months
At the first adjustment the rate can move up two points to 8.25%. The remaining balance is re-amortized over the remaining 25 years at the new rate.
The payment goes to about $2,944. That is $481 more than the teaser payment and $282 more than the fixed loan would have cost.
Now put those two numbers together. The teaser years saved $11,900. The new payment is $283 a month worse than fixed. Divide one by the other and the entire five year advantage is gone in about 42 months.
Three and a half years after the first reset, the ARM borrower is behind and stays behind. Not at the ceiling, not in a disaster scenario, just at one ordinary two point adjustment.
That is the number I would want someone to see before signing. The break-even is not somewhere far out in a hypothetical. It arrives in year eight and a half of a thirty year loan.
Taking It to the Ceiling
Following the caps to their limit: 8.25% in year six, 10.25% in year seven, and 11.25% from year eight onward.
The payment at 10.25% is about $3,446, which is $785 a month above the fixed loan.
At the 11.25% lifetime ceiling it is about $3,703, which is $1,042 a month above the fixed loan and $1,240 above the teaser payment the borrower budgeted around.
A payment that started at $2,463 ends at $3,703. It is fifty percent higher than the number on the paperwork the day of closing.
Lifetime interest on the ARM in this path comes to about $846,447, against $558,036 on the fixed loan. That is about $288,412 more.
Two hundred and eighty eight thousand dollars is not a rate difference. It is three quarters of the original loan amount, and it is the size of the room the caps leave open.
What the Caps Actually Promise
It is worth being precise about what a cap is, because the word does a lot of reassuring work it has not earned.
A 2/2/5 cap does not limit your risk to something small. It limits how fast you reach something large. In this example the ceiling is 11.25%, which is 4.6 percentage points above the fixed rate you turned down.
The caps are also asymmetric in practice. There is a floor below which the rate will not fall, usually the margin itself, so the downside for the lender is bounded in a way your upside is not.
And the adjusted rate is not a market rate. It is an index plus a fixed margin set in your note. If the margin is 2.75% and the index is at 5%, your rate is 7.75% regardless of what a fixed loan is quoting that week. Read the margin before you read the teaser rate. The margin is the number you will actually live with, and it never changes.
When an ARM Is the Right Loan
I do not want this to read as an argument that ARMs are traps. They are a legitimate product and there are situations where the fixed loan is the worse choice.
You have a hard, verifiable exit inside the fixed period. Military orders, a training program with a known end date, a job with a relocation clause. Not a vague intention to move in a few years, which is what most people mean and most people are wrong about.
You can absorb the ceiling payment without changing your life. If $3,703 a month would be uncomfortable but survivable, the ARM is a reasonable bet. If it would be ruinous, the teaser savings are not worth it at any odds.
You are buying in a high rate environment with a credible expectation of refinancing down. This is the strongest current case, and it comes with the obvious caveat that it depends on both rates falling and you still qualifying when they do.
The spread is wide enough to matter. A quarter point of teaser discount is not worth the structure. Three quarters of a point, as in this example, is at least a real trade.
Longer Fixed Periods Buy Real Time
The 5/1 is the ARM people picture, but the same product exists with longer fixed periods, and the arithmetic changes in a way worth seeing.
Holding the same 6.25% teaser and the same 2/2/5 caps against a 7% fixed loan:
A 5/1 accumulates about $11,900 of savings before its first reset, and at the 8.25% first cap the payment goes to about $2,944, which is $282 above fixed. The advantage lasts about 42 months past the reset.
A 7/1 accumulates about $16,661. Its balance at reset is lower, about $360,134, so the same cap produces a payment of about $2,916, only $255 above fixed. The advantage survives about 65 months.
A 10/1 accumulates about $23,801. Its balance at reset is about $336,951 and the first cap payment is about $2,871, which is $210 above fixed. The advantage lasts about 113 months, which is nine and a half years past the reset.
Two things compound there. You bank more months of savings, and you re-amortize a smaller balance, so the same percentage point increase produces a smaller dollar increase.
In practice a longer fixed period is priced with a smaller discount, so you will not get the same 6.25% on a 10/1 that you would on a 5/1. But if the spread between them is narrow on the day you shop, the longer fixed period is usually the better structure, and almost nobody asks for the quote.
Model Both Before You Choose
Put your own two quotes into the amortization visualizer and run them side by side.
Then work out three numbers for yourself, because they are the ones that decide it.
First, the total savings across the fixed period, which is the monthly difference times the number of fixed months. That is what you are being paid to take the risk.
Second, the payment at the first cap. Take your start rate, add the initial adjustment cap, and re-amortize over the remaining term. Compare it to the fixed payment and divide your total savings by the monthly difference. That tells you how many months the advantage survives.
Third, the payment at the lifetime ceiling. Start rate plus the lifetime cap. Look at that number and ask whether you could pay it every month for twenty years.
If the answer to the third question is yes, the ARM is a calculated risk. If the answer is no, nothing in the first two numbers makes up for it.
Model both loans in the Amortization Visualizer
Compare the teaser years against the fixed schedule and see where the balances diverge.
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About the author
De Van Do has a background in technology and built VisualMortgage out of curiosity about making mortgage math transparent. De Van Do is not a licensed loan officer or mortgage broker -- for advice specific to your situation, consult a licensed mortgage professional. Read more about VisualMortgage.