Buying a home remains one of the biggest financial decisions most people make. Alongside choosing the perfect neighborhood and home, selecting the right type of mortgage loan is crucial, especially now when interest rates remain elevated compared to recent years.
While fixed-rate mortgages have long been a popular choice for many buyers, adjustable-rate mortgages (ARMs) are gaining more attention as buyers seek affordable alternatives to today's higher fixed rates. Whether this type of mortgage is right for you depends on your financial situation, homeownership timeline, and risk tolerance.
What Is an Adjustable-Rate Mortgage
An ARM is exactly what the name implies – a mortgage with an interest rate that stays fixed for an introductory period (commonly 5, 7, or 10 years) and then adjusts up or down based on market conditions and a set formula from your lender. These adjustments typically happen every six to 12 months.
The length of the fixed-rate period and how often the rate adjusts afterward are reflected in the ARM’s name. For example, a 5/6 ARM has a fixed interest rate for the first five years, then adjusts every six months after that. A 10/1 ARM, on the other hand, has a 10-year fixed period but adjusts every year after that.
Many ARMs include rate caps that limit how much the interest rate can increase – both at the first adjustment and in future adjustments. For example, if you have a 5/6 ARM with a 2% initial adjustment cap, your interest rate can’t rise by more than 2% when it adjusts for the first time after the five-year fixed period.
Why Are ARMs Back in Focus in 2025?
Since 2022, the Federal Reserve raised interest rates multiple times to help combat inflation. As a result, fixed mortgage rates have climbed and remain much higher than the record lows we saw in 2020 and 2021. While fixed mortgage rates have leveled out a bit in 2025, they remain high enough to continue making it tough for many buyers to afford a home.
On the other hand, ARMs usually start with lower interest rates than fixed-rate loans – sometimes significantly lower. This means your monthly payment could be more affordable during the initial fixed-rate period.
Advantages of an ARM in the Current Market
Adjustable-rate mortgages can be a smart choice in today’s market, especially when interest rates are high but expected to drop, or you plan to stay in your home for only a few years. Here are some key benefits to consider:
- Increased Affordability in Expensive Housing Market
ARMs typically offer lower introductory rates than fixed-rate mortgages. This can mean lower monthly payments during the initial fixed period – a valuable advantage with today’s elevated rates. These lower payments can also improve your borrowing power, helping you qualify for a larger loan or afford a more desirable home, particularly in an expensive housing markets.
- Cost-Effective for Short-Term Homeownership Plans
If you plan to move, refinance, or pay off your mortgage before the fixed-rate period ends, an ARM can help you save money without ever reaching the adjustment phase. This makes ARMs especially appealing to buyers who expect job relocations, plan to upgrade soon, or are purchasing a starter home. The lower introductory rate helps you save on monthly payments, making it a cost-effective choice if you won't keep the loan past the fixed period. - Potential to Benefit from Falling Rates
Another thing to keep in mind is that interest rates don’t always rise after the introductory term with an ARM. It’s possible that the new lending rate might be lower than when you took out your loan. That means your ARM will adjust downward, resulting in less interest and a potentially lower monthly payment without the need to refinance or pay any fees.
Things to Consider with an Adjustable-Rate Mortgage
- Rate Caps and Adjustments
Make sure you understand how much your interest rate can increase at each adjustment and over the life of the loan. While rate caps limit how high your rate can go, keep in mind that even smaller increases can raise your monthly payments significantly over time.
- Your Homeownership Timeline
ARMs are often best suited for buyers who expect to sell or refinance before the adjustable period starts or shortly thereafter. If you plan to stay in your home for 15 years or more, a fixed-rate mortgage may offer more stability and predictability with your payments.
- Market Uncertainty
Although many experts predict interest rates will decline in the coming years, unforeseen events like inflation spikes or other economic shifts could cause rates to rise, instead. This uncertainty means your payment could increase after the fixed-rate period, so it’s important to be financially prepared for possible adjustments.
Keep in mind that if interest rates do rise at the end of your fixed-rate period, you can work with your loan office to determine if refinancing to a conventional loan or even another ARM is the right move.
Before deciding if an ARM is right for you, it’s important to carefully consider your homeownership goals and timeline. Talking with a loan officer from FNBO can help you understand your options and find the mortgage that best fits your unique situation.
