How does an adjustable-rate mortgage adjust, and what do the numbers like 7/6 ARM mean?

An ARM has a fixed introductory rate, then adjusts periodically based on a market index plus a set margin. In a 7/6 ARM, the rate is fixed for the first 7 years, then adjusts every 6 months after that. The new rate equals the index (today usually SOFR) plus the lender's margin, subject to caps. Caps are shown as three numbers, such as 2/1/5, limiting the first adjustment, each later adjustment, and the lifetime increase. ARMs make sense if you are confident you will sell or refinance before the fixed period ends, since the intro rate is often lower than a 30-year fixed. If you might stay longer, the fixed loan removes the risk of payment shock.