Prospective homebuyers have been dealt a complicated hand in recent years.
Though mortgage rates fell below 6% in late February 2026, with the war in Iran, rates bounced back to where they were at the end of 2025. As of March 12, the rate stands at 6.11%.
Affordability is the name of the game, so homebuyers who find a property they love but find themselves cash-strapped are exploring potentially riskier financing options with the promise of a lower mortgage rate.
Enter the adjustable-rate mortgage, or ARM, which offers lower interest rates but is considered riskier because it has a shorter fixed term and then can adjust higher.
The significant difference in interest rates between 30-year fixed mortgages (around 6.1%) and 5/1 ARMs (currently near 5.3%), as reported by Cotality, is leading to considerable savings for buyers. For perspective, this adjustment can save a buyer roughly $500 monthly on a $1 million loan.
Consequently, ARMs accounted for nearly half of all mortgage originations exceeding $1 million by December 2025, according to Cotality. This trend highlights a key benefit: The greater the mortgage amount, the more substantial the savings an ARM provides during its initial low-rate period.
But with the median home price hovering around $400,000 and inventory still quite low, how beneficial is an adjustable-rate mortgage to the average prospective homebuyer?
Is the risk worth the reward?
Understanding an adjustable-rate mortgage
The biggest benefit to an ARM is that it starts out at a fixed, predetermined interest rate—likely lower than what you would get with a comparable fixed-rate mortgage. The biggest drawback? The rate adjusts after a specified initial period—usually three, five, seven, or 10 years—based on market indexes. If those indexes go up, your payment will go up, too—sometimes way up!
Adjustable-rate mortgages typically gain popularity when interest rates climb, but recent market activity has challenged this conventional wisdom. Even as mortgage rates dropped from 7% to below 6.5% in early 2025, the popularity of ARMs unexpectedly increased. They captured nearly 21% of the market, reaching their highest share in three years.
If you’re a more mobile or first-time homebuyer who wants to keep your long-term options open, an ARM’s low introductory interest rate is certainly tempting. As long as you’re ready to move on before the introductory period ends, you’ll benefit from the advantage of making lower payments while you’re living in the home. And because your lender will be qualifying you based on a lower monthly payment, you could qualify for a more expensive house than you would with a fixed-rate mortgage.
“ARMs are best suited for investors or homebuyers who have short-term ownership goals in mind,” says Wells Fargo Home Mortgage Area branch manager Chris Jurilla. “Most opt for an ARM if they don’t foresee themselves staying in the home for an extended period of time. There are some who use it as a steppingstone loan, a short-term solution with a lower monthly payment.”
Can you refinance after an ARM term is over?
Some ARMs allow you to automatically take advantage of lower rates without the hassle and expense of refinancing.
However, one of the assumed risks and drawbacks is that, after the introductory term, payments and rates can rise substantially. Additionally, if market indexes go down, that doesn’t necessarily mean your mortgage payments will, too.
When you’re ready to refinance, you can switch from an ARM to a fixed-rate loan, potentially lowering your interest rate, and create more predictable monthly payments. It’s advised to refinance before your ARM’s rate resets, though, if you anticipate a significant increase in mortgage rates to come.
There is also typically a prepayment penalty. You can’t pay off your loan for the number of years specified in your agreement. So, if interest rates jump while you still have a prepayment penalty in place, you can’t refinance or sell your home without incurring a huge cost.
The 5/1 adjustable-rate mortgage
The 5/1 adjustable-rate mortgage—the most popular ARM out there—has what’s called an introductory “teaser” rate that’s lower than what you’ll get with a fixed-rate mortgage.
The five-year ARM’s time frame is based on the common real estate advice from experts that homeowners need to stay put in their home for at least five years before selling to ensure they reach their break-even point.
Today, however, home appreciation has slowed compared with the last five years. The latest existing-home sales show that while home prices are up 3.8% in February 2025 compared with a year before, home prices appreciated just about 17.9% on average, according to data from Realtor.com®.
And the pace is continuing to slow.
So, in a nutshell, you’ll have to put in significantly more work to figure out the math of an ARM and how it could potentially affect your budget when choosing a variable-rate loan.
Picking variable-rate loan when rates are high
As of March 2026, the Freddie Mac rate for a 30-year loan stayed roughly in the 6.1% range, following a brief dipping below to 5.98%, the first time it had been below 6% since 2022.
Meanwhile, when looking at variable-rate loans like ARMs, the rates are significantly lower.
Three-year ARM rates
The purchase price, according to SmartAsset, as of this publishing date was 4.39%. The refinance was 4.63%.
Five-year ARM rates
The purchase price, according to SmartAsset, as of this publishing date was 5.44%. The refinance was 5.45%.
Seven-year ARM rates
The purchase price, according to SmartAsset, as of this publishing date was 5.19%. The refinance was 5.38%.
Additional reporting provided by Lisa Marie Conklin.
