Why adjustable-rate mortgages are trending but tricky for some homebuyers

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com

Article originally posted in Orange County Register on October 22, 2026

Why are adjustable-rate mortgages trending?

In these extraordinarily unaffordable homeownership times, every chance to lower interest rates and mortgage payments helps in the here and now.

For example, today a well-qualified borrower can capture a 6.99% interest rate on a 30-year fixed rate mortgage. On an $800,000 loan, the principal and interest payment is $5,317. That same borrower can find a five-year adjustable-rate mortgage (30-year amortized mortgage that starts adjusting in year six) at 6.25%, lowering the monthly payment to $4,926, or $391 less monthly. Over 12 months, that borrowers saves $4,692 and $23,460 over five years.

Certainly, $23,000 in savings could easily cover the cost of a refinance with money left over.

“As (fixed) rates rise, ARMs become more attractive,” said Brennan O’Connell, director of data solutions, Optimal Blue. “Borrowers believe that with future (fixed) rates, they could do better.”

Are there any ARMs with a starting rate much lower than the roughly 0.75% spread between fixed and adjustable rates in the example cited above?

“In the olden days, adjustable rates started at half (the 30-year mortgage interest rate) of what the fixed rates were at,” said Guy Cecala, executive chairman at Inside Mortgage Finance. “Now, ARMs start at 100 basis points (1%) lower than fixed rates.”

In today’s market, ARMs through Fannie Mae, Freddie Mac, Federal Housing Administration or the Veterans Administration are no deal for borrowers. They do not start 1% below fixed rates. Rather, they start very close to the fixed rate.

To find the low, starting-rate ARM, you must go to portfolio lenders — those using depositor funds for mortgages such as banks and credit unions. Some banks allow mortgage brokers access to their portfolio products, but most do not.

What if you wanted to refinance into another adjustable-rate mortgage in five years (as some do) to keep the payment as low as possible?

Be mindful that anytime you are trying to qualify for a new adjustable-rate mortgage, the qualifying interest rate is much higher than the initial start rate. Depending on the investor, you might be qualifying at 2% over the start rate or the index plus margin or even higher than both. (Keep reading: Below, I provide a brief explanation of the way ARM interest rates are calculated.)

So, if you’ve locked into, say, a 10-year adjustable to get you to retirement, you might not be able to qualify for a new adjustable (or a fixed-rate mortgage, for that matter) if your income becomes substantially lower. Good or bad, you may have to live with a mortgage that adjusts every six months or one year after the initial lock period.

Adjustable rates are trending. Here’s a look at the numbers …

For the second quarter of 2026 (the latest available data), 17% of all funded mortgages used adjustable-rate loans, according to Inside Mortgage Finance. The last time the ARM market share was this high was the fourth quarter of 2022 at 20%.

What are the pros and cons of ARMs?

Pros

—Great savings for short-term owners. For example, the borrower takes a seven-year adjustable loan knowing they’ll sell in seven years or less.

—Much less risky than yesteryear’s (mortgage meltdown days and prior) rates that had prepayment penalties, balloon payments and eyepopping adjustments

—Lower initial payments than fixed rate mortgages

—Potential for the mortgage rate to drop when the loan starts to adjust

—Built-in rate caps (home equity lines max cap is usually 18% with no intermediate caps)

Cons

—Risk of payment shock when the mortgage adjusts

—Potential for higher long-term costs if rates move up

—Tougher to qualify for versus a fixed rate mortgage

—Refinance trap: If a home’s value drops, the borrower might not be able to move over to a fixed-rate should the ARM rate spike

—Budgeting uncertainty

Excluding home equity lines-of-credit, how do adjustable-rate mortgages work?

ARMs are usually amortized over 30 years. They start with a fixed interest rate for the first five, seven or 10 years.

After the initial fixed period, the mortgage interest rate is recalculated based on the existing loan balance, the Secured Overnight Financing Rate index (usually) and a profit margin added to the index to calculate the new rate. After the initial fixed period, the mortgage rate can be recalculated either every six months or once every 12 months.

SOFR is a measurement used to calculate the cost of borrowing money overnight by using Treasury securities as collateral.

For example, let’s say it’s now time for a five-year ARM to adjust. The initial rate was 2.75%. (Remember, covid years came with ultra-low rates.) We take the SOFR 30-day average rate which is at 3.887%. The margin added to the rate is 2.75%. The new rate is 6.63% for the next six months.

This loan happened to have caps of 5/1/5. This means the mortgage rate can go as high as 5% over the start rate on the initial adjustment, depending on the index plus margin. In this example it could have gone up to 7.75%.

On subsequent adjustments, the rate can go up (or down) a maximum of 1% each six months when adding the index plus margin.

The interest rate life cap is also the same as the initial 5% adjustment. No matter what, the mortgage rate can never exceed 7.75%.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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