How does a 5/1 ARM rate adjustment and cap work?

A 5/1 Adjustable-Rate Mortgage (ARM) fixes your interest rate for the initial 5 years; after year 5, the rate adjusts once every 12 months based on a benchmark index (typically the 30-day average SOFR) plus a fixed lender margin (often 2.75% to 3.00%). To protect borrowers from hyper-inflationary spikes, ARMs use rate caps expressed in a 3-tier structure (e.g., 2/2/5): (1) Initial Cap (2%): Your rate cannot adjust higher or lower than 2% above your starting rate on the first adjustment. (2) Periodic Cap (2%): The rate cannot adjust by more than 2% in any subsequent year. (3) Lifetime Cap (5%): The interest rate can never exceed 5% above your initial starting rate over the entire 30-year life of the loan.