When interest rates rise, homebuyers look for ways to make their purchases more affordable. And that means adjustable-rate mortgages, or ARMs, are on the table. But today’s ARM rates are all over the place. Should you still consider these loans when you’re financing a home?
How Do ARM Rates Work?
ARMs are mortgages with rates that are fixed for an introductory period and then reset at regular intervals — usually once a year or every six months.
ARMs can be safer for lenders because their rates go up when rates in the general economy increase. It helps lenders keep things in balance — no one wants to be earning 4% in an 8% world. To get borrowers to accept an adjustable loan, though, lenders have to discount its interest rate for an introductory period — typically three, five, seven or 10 years. You can tell how an ARM will work by its name. For example, a 10/6 ARM is fixed for 10 years and then adjusts every six months. A 5/1 ARM is fixed for five years and then adjusts once a year.
[See: Compare Current 5/1 ARM Rates from Top Lenders]
Are ARM Rates Better Than Fixed Rates?
Historically, yes. ARM introductory rates have run significantly lower than fixed rates on mortgages most of the time. This allows homebuyers to start with a lower rate and save some money. At least, in theory. It’s smart to check ARM interest rates when deciding between an ARM and a fixed loan because mortgage market conditions can change quickly.
Why Are Today’s ARM Rates so High?
“Anyone can benefit from an ARM, really,” says Barry Habib, CEO of MBS Highway, a company that provides daily mortgage market insights to loan originators. “The thing is, because of the difference between shorter-term rates and longer-term rates, they’re less attractive.”
ARM rates have been high compared with fixed rates because the economy has gone through an atypical period. Usually, rates for long-term investments are higher than those of short-term investments. It makes sense that investors would get a higher rate of return in exchange for tying up their money for a longer period, and mortgages are investments.
In the summer of 2022, though, this pattern reversed, with shorter-term rates surpassing longer-term rates. Economists call this an inverted yield curve, and historically, it has preceded recessions. However, no recession occurred. In 2024, as you can see from the graph below, short-term bond rates were higher than long-term rates, hovering in the 4% range for most of the year. But in November, the curve began to normalize and has continued to do so.
Historical Fixed vs. Adjustable Mortgage Rates
Freddie Mac tracked the spread between 5/1 ARMs and 30-year fixed mortgages between Jan. 7, 2016, and Nov. 10, 2022, and you can see from the graph below that it varied considerably. The spread between 5/1 ARMs and 30-year fixed rates averaged over 0.6 percentage point during that period and at times approached 1.5 percentage points. But sometimes ARM rates were nearly as high as fixed rates. Or even higher, during the COVID-19 pandemic. In 2024, this popular solution to high mortgage rates practically evaporated from the market, leaving would-be homebuyers frustrated. But the situation began to improve in 2025.
In March 2025, the start rate for a 5/1 was about 6% for strong borrowers and about 6.35% for 30-year fixed loans. If the yield curve continues to normalize, this spread could widen even more.
Why You Might Want an ARM Even Now
Even when the spread between ARM and fixed rates is low, there are a couple of reasons to consider adjustable home loans.
Lower Is Lower
If your ARM rate is lower than the fixed option, you’re still saving money, even if the savings are less than you’d like.
The table below shows how much one could save at different interest rates and loan amounts over five years. The first column shows the cost of a 30-year fixed-rate loan at 7% over five years. The other three columns show how much lower that cost would be with an interest-rate reduction of 0.25, 0.5 and 0.75. The savings with a 0.25 reduction might seem a little underwhelming, especially at lower loan amounts, but money is money.
How Much Can You Save in 5 Years?
ARMs Work Better at Higher Loan Amounts
Even a small rate reduction saves money over time, and that’s especially true at higher loan amounts. Researchers at the Federal Reserve found that ARMs were about three times as popular with borrowers in the top 10% income bracket, who also tend to choose larger loans, than with borrowers in the bottom 10%. The study concluded that consumers with higher incomes were better positioned to absorb the risk of a rate increase than those with lower incomes.
“In the high-end real estate market, ARMs remain a popular choice because they offer lower initial interest rates, which can translate into significant savings for borrowers with large mortgages,” says David A. Krebs, principal broker at DAK Mortgage in Miami. “While ARMs may face criticism for potential rate increases, they offer flexibility and cost savings that appeal to borrowers in high-value transactions, where even small rate differences can impact significantly.”
ARM Rates Go Down, Too
If you believe that interest rates will be heading lower in the coming years, getting an ARM allows you to access the lower rate automatically. If you choose a fixed loan, you’ll have to refinance to benefit from lower rates. That means applying for a new loan and incurring a new set of closing costs. While some lenders are offering “free refinancing” on their fixed-rate mortgages right now, there’s no guarantee that the rate you’ll get is a bargain. And depending on the promotion, you may still be on the hook for title insurance and other third-party costs.
[Read: Best Mortgage Lenders]
ARM Rate: Things to Consider
By matching an ARM’s initial fixed-rate period to your expected tenure in the property, you may never be exposed to the adjustable part of your mortgage. That being said, it’s not the end of the world if you are. “You have to remember, a five-year adjustable loan is not just better for five years,” says Habib. “It’s really better for seven or eight years. Because with the money you save in the first five years, even in the worst case, you’d still be ahead of the game.”
ARM loans are more complex than fixed-rate mortgages. When comparing ARM loans, understand these terms:
The loan index is a published interest rate that moves as economic conditions change. Common indexes and their value (as of March 26, 2025) include:
— The Secured Overnight Financing Rate, or SOFR, is 4.33%.
— The Wall Street Journal Prime Rate is 7.5%.
— The Constant Maturity Index, or CMT (five-year), is 4.09%.
— The 11th District Cost of Funds Index, or COFI, is 3.666%.
The loan margin is the number of percentage points that the lender adds to the index to calculate your interest rate. Freddie Mac requires the margins on SOFR ARMs to be 1% to 3%.
Rate adjustment caps limit how much your interest rate can change. There’s usually one cap for the first adjustment and a different one for subsequent adjustments.
The lifetime cap limits how high your loan’s interest rate can go over the life of the loan.
The fully indexed rate equals the index plus the margin. It tells you what your loan’s interest rate would be if it were adjusting today. This number is important if you expect to have your mortgage after it exits the fixed period and begins adjusting.
When shopping for an ARM, consider ARM start rates and costs, but also calculate the fully indexed rate. To make the best comparisons, get all quotes from competing lenders on the same day.
[A Guide to Seller-Paid Mortgage Rate Buydowns]
When Will ARM Rates Improve?
If interest rates only went up and never fell, we’d be paying astronomical rates today. But the cliche is right: What goes up must come down.
“A lot depends on seeing some spreads become more normal in the yield curve,” Habib says. “That means if the job market gets weaker and if inflation cooperates.”
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Why All the Hate for Adjustable-Rate Mortgages? originally appeared on usnews.com
