Overview
Homebuyers typically choose adjustable-rate mortgages (ARMs) when interest rates go up. However, even though rates are starting to drop, more people are opting for ARMs.
- Most modern ARM buyers plan to refinance or sell before the fixed-rate period ends.
- In states like California, the ARM share is as high as 31% because home prices haven't dropped alongside the rates.
- For homes in the $400k–$1M range, the ARM share rose to 15% in late 2025.
While the 30-year fixed-rate mortgage remains the undisputed anchor of American homeownership, its role is starting to shift. What used to be a primary tool for affordability is now, for some, becoming a barrier to getting in the door.
We’ve spent decades viewing the 30-year fixed-rate mortgage as the gold standard. By locking in a set payment for three decades, generations of buyers insulated themselves against inflation and market volatility. However, Cotality data shows that traditional connections are starting to decouple.
Conventional thinking has always been that adjustable-rate mortgages (ARMs) thrive only when rates are rising, but that logic has been turned upside down. Even after mortgage rates eased from 7% to below 6.5% in early 2025, ARMs’ momentum didn’t slow. They actually gained ground, making up nearly 21% of the market—their highest share in three years.
Even with 30-year fixed rates dropping to around 6.1% in early 2026, the gap between fixed and ARM rates remains significant. A 5/1 ARM is currently hovering near 5.3%, and a $1 million loan in pricey markets like California or Washington, D.C.; that 0.8% difference saves a buyer nearly $500 per month. For many people, that isn't just a nice discount—it's the only way they can qualify for the loan.
These buyers are not marrying an interest rate; they’re just dating it. The bet is that today’s dip is only the start of a downward trend, or that they are choosing available cash in the short term over a guarantee of consistent payments down the road.
Comparing the ARM share with mortgage rates from January 2010 to December 2025
Source: Cotality Public Records, Freddie Mac and MBA, 2026
The resurgence of ARMs is most pronounced in high-cost markets where the affordability gap is widest. In California, ARMs accounted for more than 31% of mortgage originations in 2025, and similar surges occurred in the District of Columbia (28%) and Massachusetts (~24%). In these areas, ARMs have transitioned from being a niche choice for risk-tolerant buyers to a crucial option for those looking to break into the market or upgrade to a larger home.
Modern ARM products, typically structured as 5/1 or 7/1 resets, come with better protections than those we saw before 2008. Even so, seeing them take over as they have of late represents a significant departure from American housing tradition. We are entering a new, hybrid era of home financing, where adjustable-rate loans are becoming the primary option instead of the traditional 30-year fixed mortgage.
Conventional ARM share by loan size: January 2005 to December 2025
Source: Cotality Public Records, 2026
Along with pricey markets, the ARM trend is especially visible in the luxury and high-end housing sectors. By December 2025, nearly half of all mortgage originations exceeding $1 million were ARMs.
As affordability remains the dominant hurdle, long-term stability has been replaced by short-term cash flow survival, and the industry is embracing a shift toward more dynamic debt solutions. Ultimately, a significant and sustained drop in overall mortgage rates would likely be the primary catalyst for a return to tradition.
If and when 30-year fixed terms become more competitive, the market would likely pivot back to the predictability and stability that dynamic debt solutions struggle to match.
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