After the Fed’s Rate Cut, Adjustable-Rate Mortgages Could Be a Hidden Gem, Experts Say

With the Federal Reserve’s latest interest rate cut sending ripples through financial markets, many potential homebuyers are revisiting their mortgage options and one long-overlooked product is suddenly back in focus: adjustable-rate mortgages (ARMs).

While fixed-rate loans have long dominated the market, recent economic shifts have made ARMs increasingly attractive. These loans, which feature a lower introductory rate that adjusts after a set period, could offer buyers substantial short-term savings a rare advantage in a housing market still grappling with high prices and affordability challenges.

According to data from the Mortgage Bankers Association (MBA), the average 30-year fixed-rate mortgage fell to 6.3% for the week ending October 24, its lowest level since September 2024. Meanwhile, a 5/1 ARM averaged just 5.66%, nearly a full percentage point lower a difference that can translate into hundreds of dollars in monthly savings.

“At this point, adjustable-rate mortgages are an underappreciated opportunity,” said Brad Houle, principal and head of fixed income at Ferguson Wellman Capital Management in Portland, Oregon, one of CNBC’s top-ranked financial advisory firms for 2025.

Adjustable-Rate Mortgages Are Making a Comeback

After years of disinterest, ARMs are slowly regaining traction. They accounted for about 10% of all mortgage applications in September, the highest share in nearly two years, according to MBA data.

“That’s been a consistent trend lately,” said Joel Kan, MBA’s deputy chief economist. “With rates on ARMs significantly lower than fixed loans, borrowers can save roughly $200 a month on a $400,000 mortgage — and that’s a meaningful difference for many households.”

ARMs typically come in structures such as 5/1, 7/1, or 10/1, meaning the initial interest rate remains fixed for five, seven, or ten years before adjusting annually based on broader market conditions. This setup can be especially appealing to buyers who don’t plan to stay in the same home long-term or who expect rates to continue easing over time.

Following the Fed’s rate cut and growing speculation about further reductions by year’s end, many analysts believe the next several years could be favorable for borrowers who opt for an adjustable loan today.

“If the broader trend of easing interest rates continues, borrowers with ARMs could be well-positioned,” Houle added. “They’ll start off with lower payments and possibly refinance into an even lower fixed rate later on.”

The Lingering Stigma and Modern Safeguards

Despite renewed interest, ARMs still carry baggage from their notorious role in the 2008 financial crisis, when lax underwriting and aggressive loan terms led many borrowers to default once their payments reset.

“ARMs got a bad reputation during the housing crash, and understandably so,” Houle acknowledged. “But lending standards today are far more stringent. Borrowers must demonstrate solid credit profiles and the ability to handle rate adjustments.”

Kan agreed, noting that today’s ARM borrowers tend to be higher-income and more creditworthy than in the past. These loans are often used for larger balances or in high-cost housing markets where even a small rate difference makes a big impact.

Understanding the Risks

While ARMs can provide meaningful savings upfront, they’re not without risk. Once the initial fixed period ends, the interest rate adjusts based on an index often tied to the prime rate or the 10-year Treasury yield. If rates rise substantially, monthly payments can increase, potentially straining a homeowner’s budget.

“Problems can arise if the borrower isn’t prepared for that payment change,” Kan cautioned. “ARMs make the most sense for those who expect to move or refinance before the adjustment period kicks in.”

Buyers considering an ARM should pay close attention to loan caps, which limit how much the rate can increase per adjustment and over the life of the loan. Many modern ARMs have safeguards in place that prevent the kind of runaway rate spikes that plagued borrowers two decades ago.

The Right Borrower, the Right Timing

Experts say the key to making an ARM work is understanding your financial timeline. Homebuyers who anticipate staying in their home less than seven to ten years or who have a clear plan to refinance could benefit the most.

“It really depends on your time horizon,” Kan said. “If you’re confident that you’ll sell or refinance before the rate adjusts, it can be a smart, cost-effective choice.”

For now, ARMs represent a calculated risk that could pay off as the Fed’s rate cuts filter through the economy. And with home prices still at record highs, any opportunity to trim borrowing costs is worth a closer look.

“The market has changed,” Houle summarized. “ARMs aren’t the villains they once were — for the right borrower, they’re a strategic tool in an otherwise challenging housing market.” For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.