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What home buyers need to know about ARMs
Wednesday’s Federal Reserve decision, along with expectations that the Fed could cut interest rates again before the end of the year, may put more downward pressure on mortgage rates — finally providing a little relief for would-be homebuyers.
A 30-year, fixed-rate mortgage fell to 6.3% for the week ended Oct. 24, according to the Mortgage Bankers Association.
Although mortgage rates are now at their lowest level since September 2024, the average rate for a 30-year, fixed-rate mortgage is still significantly higher compared to the under-3% levels near the start of the pandemic.
Those relatively high mortgage rates, along with high home prices and uncertainty about the economy, have kept many would-be buyers on the sidelines.
But adjustable-rate mortgages, or ARMs, offer even lower initial rates than fixed-rate loans. With these mortgages, the initial interest rate is fixed for a set amount of time — often five, seven or 10 years — before adjusting based on interest rate changes.
The ARM rate is currently almost a percentage point lower than the 30-year fixed rate, according to the MBA’s data from earlier this month.
For a 5/1 ARM, the average interest rate is 5.66%, according to the MBA.
At this point, ARMs may be “an underappreciated opportunity,” according to Brad Houle, principal and head of fixed income at Ferguson Wellman Capital Management in Portland, Oregon, which ranked No. 12 on CNBC’s Financial Advisor 100 for 2025.
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Because these home loans are less expensive in the short term, adjustable-rate mortgages are making a comeback, experts say. ARMs accounted for about 10% of all mortgage applications in September, according to the MBA, the highest share in almost two years.
“That has been a trend that has been pretty consistent, and a lot of that is because the arm rate is significantly lower than the fixed rate,” said Joel Kan, MBA’s vice president and deputy chief economist.
“If you assume a $400,000 loan, that’s about a $200-per-month lower payment. That’s a big reason for why ARMs in general have been more popular,” Kan said.
A ‘For Sale’ sign is posted beside property for sale in Alhambra, California, on August 28, 2025.
Frederic J. Brown | AFP | Getty Images
Yet, ARMs still aren’t nearly as trendy as they were during the subprime mortgage crisis in the mid-2000s — when the ARM share peaked at 35%, but looser credit standards then caused problems for many borrowers.
“ARMs do have a bad reputation from the financial crisis,” said Houle.
However, a lot has changed since then. These days, “the tendency is for ARM borrowers to be higher credit quality because they are pretty stringently underwritten,” said MBA’s Kan.
That means ARMs may also be harder to qualify for and are often reserved for larger loan sizes.
Some risks of ARMs remain
“For potential homebuyers on the sidelines, that is a good way to finance a purchase,” Houle said, particularly if long-term interest rates continue to fall. Although adjustable-rate mortgages are pegged to the prime rate, the 10-year Treasury influences the longer-term outlook.
Some risks remain. After a certain period, the rate on the ARM will adjust to reflect current market conditions. If rates have moved higher, borrowers could end up with an interest rate that is substantially higher than a fixed-rate loan — and a bigger monthly mortgage payment.
Problems will arise “if there is a payment adjustment and the borrower is not equipped to handle that change in payment,” said Kan.
For that reason, an ARM may make sense for buyers who anticipate moving or refinancing into a fixed-rate loan before the initial rate period expires.
Whether this is the right option often depends on your time horizon, Kan said.
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