In a landscape where mortgage rates are climbing, homebuyers are increasingly searching for more economical solutions. One potential option gaining traction is the adjustable-rate mortgage (ARM), which may provide some relief from rising costs.
According to the Mortgage Bankers Association (MBA), for the week ending April 11, 2025, applications for ARMs surged to their highest level since November 2023. This shift comes as borrowers are drawn to the initial lower rates ARMs offer.
“Given the jump in rates, more borrowers are opting for the lower initial rates that come with an ARM, with initial fixed rates closer to 6% in our survey last week,” stated Mike Fratantoni, MBA’s SVP and chief economist, in a press release.
Data from MBA also illustrates that the average fixed 30-year mortgage rate increased by 20 basis points to 6.81%, prompting many to consider ARMs as a potentially cheaper alternative. However, is this choice advisable?
Why Borrowers Are Considering ARMs
Jennifer Beeston, executive vice president of national sales at the mortgage lender Rate, explains, “Generally, ARM rates are lower than fixed mortgage rates, however, how much lower depends on market conditions.” She notes that while ARM rates have been similar to fixed rates in recent years, they are now diverging.
ARMs typically offer lower rates than fixed mortgages, allowing buyers to achieve affordability even when overall rates are high. This can translate into smaller monthly payments or the ability to afford a more expensive home.
Understanding Adjustable-Rate Mortgages
Unlike fixed-rate mortgages, which maintain the same interest rate throughout the loan’s term, adjustable-rate mortgages offer an initial fixed rate for a few years before rates begin to fluctuate based on market conditions.
Example of a 5/1 ARM
The 5/1 ARM is among the most popular adjustable-rate options. For instance, with a 5/1 ARM at 6.20%, the initial rate remains fixed for five years. After this period, the rate adjusts annually. If market rates rise, the mortgage rate will likely increase, affecting monthly payments. Some variations, like the 5/6 ARM, adjust every six months after the initial period.
Are ARMs Risky?
Adjustable-rate mortgages carry certain risks as monthly payments can rise over time. “Personally, I am not a huge fan of ARMs unless the borrower is educated on the risks and has a firm understanding,” Beeston cautions. While ARMs include caps on rate changes, refinancing may not always be an easy escape if rates climb or personal financial conditions change.
Fixed vs. Adjustable: Which is Better in 2025?
Borrowers with short-term housing plans might find ARMs appealing, as they can avoid rate adjustments by selling before the fixed-rate period ends. Conversely, those planning to stay longer might benefit from a 30-year fixed-rate mortgage. “A 30-year fixed is fantastic for risk-averse borrowers,” Beeston recommends, emphasizing the stability offered by the ability to lock in a rate for the loan’s duration.
Potential Savings with an ARM
Savings from an ARM depend on individual circumstances and lender offers. Consider a scenario where a 5/1 ARM offers a 6.20% rate while a 30-year fixed mortgage is at 6.80% on a $300,000 loan. The monthly payment for the ARM would be $1,837, compared to $1,955 for the fixed-rate mortgage during the first five years. To explore potential savings, consult a lender and keep updated with daily mortgage rate coverage.
