With Mortgage Rates Cooling, Is an ARM Worth Considering?

Should I get an ARM mortgage, or is a fixed-rate loan the smarter choice?

Recent economic indicators suggest that mortgage rates are expected to decline gradually. The average 30-year fixed rate began March 2025 by dropping to 6.63% from 6.76%.

As rates cool, many homebuyers are wondering if an adjustable-rate mortgage (ARM) is a good option.

If you’re thinking about getting an adjustable-rate mortgage for your next home purchase, you’ll want to make an informed decision.

What is an ARM?

An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate changes over time.

Unlike a fixed-rate mortgage, which locks in a single interest rate for the entire loan term, an ARM typically starts with a lower introductory rate before adjusting periodically based on market conditions.

Here are the key terms you need to know when it comes to ARMs:

• Introductory Rate (Teaser Rate): A lower fixed interest rate that applies for an initial period (e.g., 5, 7, or 10 years). After this period, the rate adjusts at set intervals.
• Adjustment Period: How often the rate changes after the initial fixed period (e.g., annually or every six months).
• Index: The financial benchmark that determines the new rate after adjustments. Common indexes include the SOFR (Secured Overnight Financing Rate) and the 1-Year Treasury Index.
• Margin: A fixed percentage added to the index rate to determine your new interest rate when adjustments occur.

For example, a 5/1 ARM has a fixed rate for the first five years, then adjusts annually after that.

Why an ARM may not make sense with mortgage rates cooling

ARMs can be an attractive option when interest rates are high because they offer lower initial payments. However, with mortgage rates expected to decline gradually, locking in a fixed-rate mortgage might be the smarter move for some mortgage borrowers.

Let’s break this down further.

1. Despite the potential benefits, ARM loans also carry inherent risks.

When mortgage rates are high or unpredictable, ARMs can help mortgage borrowers save money upfront. However, when rates are expected to drop, an ARM could become less appealing because:

• If you take an ARM now and rates decrease, you may end up refinancing anyway to secure a lower rate.
• A fixed-rate mortgage could allow you to lock in a declining rate now instead of risking future adjustments.

2. The risks of an ARM if rates don’t fall as expected.

While forecasts suggest gradual rate declines, there’s no certainty that this will happen.

Economic factors, including inflation, remain unpredictable, meaning there’s no guarantee. If inflation rises again and the Federal Reserve responds by increasing rates, mortgage rates may not come down as expected.

If rates don’t decline, homeowners with ARMs could face:

• Higher payments after the introductory period.
• Uncertainty about future costs.
• Potential refinancing challenges if home values decline or credit requirements tighten.

Conversely, fixed-rate mortgage loans may start with a higher rate but provide stability and predictability.

With a fixed rate, you’re shielded from potential future increases, offering a sense of security and simplifying long-term financial planning. In an uncertain economic climate, this reliability can be a significant advantage.

For those who want predictability and stability in their monthly payments, a fixed-rate mortgage may be the safer choice.

How to decide if an ARM loan is right for you

An ARM is essentially a wager on the direction of future mortgage rates. If you anticipate rates will drop in the coming years, an ARM gives you the opportunity to benefit from lower payments once the fixed-rate period ends.

However, according to Lawrence Yun, chief economist at the National Association of Realtors, “mortgage rates will modestly trend lower.” He went on to say, “Given that mortgage rates have stayed above 6 percent for more than two years, consumers are getting used to the new normal, especially considering that the 50-year average is 7.7 percent.”

While ARMs carry some risk, they can be a strategic option for the right mortgage borrower. Here’s when an ARM might make sense:

You Plan to Move or Refinance Within a Few Years. If you know you’ll sell your home or refinance before the introductory rate ends, an ARM can help you save on interest payments in the short term. A 5/1 or 7/1 ARM could be a good fit if you’re not planning to stay in the home long enough for rate adjustments to become an issue.

You Expect Your Income to Increase. Mortgage borrowers anticipating significant income growth—whether through career advancements, business success, or other sources—might find an ARM beneficial. If your earnings increase over time, higher future payments may be manageable, making the lower initial rate a worthwhile trade-off.

You’re Comfortable with Rate Adjustments and Market Fluctuations. If you have a high-risk tolerance and are financially prepared for potential rate increases, an ARM could still be an attractive option. However, be sure to consider rate caps, which limit how much your interest rate can increase per adjustment period and over the life of the loan.

But why not just refinance an ARM to a fixed-rate mortgage if rates increase?

If you opt for an ARM, you have the option to refinance into a fixed-rate loan once the initial period ends, or you can even refinance prior to that time.

However, refinancing typically involves closing costs and fees–typically ranging from 2% to 5% of the loan amount—so it’s important to monitor interest rates carefully to ensure you refinance at the most favorable time.

Something else to consider is that if rates continue to climb, you could end up paying more than expected before you have the chance to refinance. Additionally, if rates rise sharply, refinancing into a fixed-rate mortgage may lock you into a higher rate than you originally planned.

The bottom line: ARM vs. fixed-rate

The decision between an ARM and a fixed-rate mortgage comes down to your financial situation, risk tolerance, and future plans.

Given today’s market conditions, where rates are merely projected to decline gradually, a fixed-rate mortgage may be the safer and more predictable choice for many homebuyers. However, if you fit the profile of a strategic ARM borrower, it could still be a worthwhile option.

Before making a final decision, consult with a mortgage professional who can help analyze your specific financial goals and risk tolerance. Choosing the right mortgage now can save you thousands in the long run.