When you get a mortgage, you have to choose between two types of interest rates. The first is a fixed interest rate, which remains the same for your entire loan term. The second? That’s an adjustable mortgage rate, which changes throughout your loan term and causes your monthly payment to increase or decrease. Fixed-rate mortgages are typically more popular, but adjustable-rate mortgages (ARMs) have recently gained traction. So, should you also be considering an adjustable-rate mortgage?
Read more: How to get the lowest mortgage rate possible
If you’re just looking at the broader market, conditions are ripe for taking out an ARM. In the short term, using an ARM instead of a fixed-rate mortgage in today’s housing market can save you quite a bit on your rate and monthly payment.
According to the Mortgage Bankers Association (MBA), the current average rate on 30-year fixed-rate mortgages as of late August was 6.68%. On a $300,000 mortgage loan, your monthly payment toward principal and interest would be $1,932.
The average rate on 5/1 ARMs was 6.01%, putting your monthly mortgage payment at $1,801. That’s a savings of over $200 per month (at least for the first five years, before your rate resets).
Future market projections also make ARMs a worthwhile choice. The Federal Reserve is poised to reduce rates later this year, and according to both Fannie Mae and the MBA, mortgage rates are expected to decline steadily over the next couple of years. Yahoo Finance’s five-year mortgage rate forecast also projects a decline.
Should those predictions come to fruition, rates on ARMs would also come down too. Your interest rate would fall at your ARM’s next adjustment period, and so would your monthly payment.
However, no one has a crystal ball about what long-term mortgage rates will do. While interest rates are poised to decrease gradually, there’s no guarantee.
Learn more: Fixed-rate vs. adjustable-rate mortgage — Which should you choose?
Market conditions are only one piece of the puzzle, though. To determine if an ARM is a smart move, you need to consider your personal finances, goals, and other factors.
How long do you expect to live in this house and have the mortgage? Will you sell the home or refinance your mortgage before the rate on your ARM can start to adjust?
Most ARMs have a set rate for the first three, five, seven, or 10 years, and after that introductory rate period, it can move up or down based on the index it’s tied to. As long as you plan to be out of the loan before the end of your intro rate period, you’re safe from any potential mortgage rate increases.
You should also consider your financial situation, specifically your income. Do you have a consistent income you can rely on each month, or does it vary monthly or seasonally? Do you expect to earn more or less in a few years? Is your job stable?
The answers to these questions can help you decide if you can handle shifting mortgage payments over the years. If your budget is already tight with the introductory ARM rate, and you don’t expect to earn much more in a few years, you could be setting yourself up for financial strain.
While market conditions currently point to rates falling in the next few years, things could change significantly over time. You will need to make sure you’ll have the funds to cover a higher payment should rates go up later.
ARMs have caps that limit how high your rate can go initially, at each adjustment period, and over the life of the loan. So, your best bet is to apply for the home loan, check out the terms and rate caps a mortgage lender offers, and use these numbers to determine your absolute maximum payment. This information can help you decide whether an ARM fits into your budget — both now and in the long run.
If you’re still not sure what the right move is, consider talking to a mortgage professional or financial advisor. They can look at your financial picture and make recommendations that fit your goals and budget.
If you’re just looking at market conditions, 2025 can be a good time to take out an ARM. First of all, average rates are quite a bit lower than those on fixed-rate mortgages, which can save you money on your monthly payment. Second, rates are expected to decrease in the coming years. This would result in a lower rate and monthly mortgage payment.
The biggest downside of an ARM is its unpredictability. With ARMs, your interest rate can rise or fall over time, taking your payment up or down with it. This makes it hard to budget for and, in some cases, may make it hard to stay on top of payments. Falling behind on payments could put you at risk of losing your house to foreclosure.
While it’s possible to see 3% mortgage rates again, it’s not likely. The bargain-basement rates seen during the height of the COVID-19 pandemic resulted from the Federal Reserve zeroing out its federal funds rate — the rate that other interest rates tend to follow — in hopes of spurring economic activity. Barring any big downturn like that again, those ultra-low rates probably aren’t in the cards.
An ARM might be a bad idea right now if you have a variable income that would make it hard to handle higher monthly payments should your rate increase down the line. A fixed mortgage rate could also be better if you plan to stay in your home for the long haul, because the fixed payments are easier to budget for. You also might not want to take out an ARM if mortgage rates are projected to rise over the next few years.
Laura Grace Tarpley edited this article.
