This article is based on information from multiple sources, including content originally published in Yahoo Finance on March 12, 2026, written by Dina Satore-Bodo with reporting by Lisa Marie Conklin, and material from National Mortgage Professional (March 23, 2026) by Lew Sichelman. All content has been compiled and edited for clarity and relevance.

Prospective homebuyers have been dealt a complicated hand in recent years.

Though mortgage rates fell below 6% in late February 2026, with the war in Iran, rates bounced back to where they were at the end of 2025.

Affordability is the name of the game, so homebuyers who find a property they love but find themselves cash-strapped are exploring potentially riskier financing options with the promise of a lower mortgage rate.

Enter the adjustable-rate mortgage, or ARM, which offers lower interest rates but is considered riskier because it has a shorter fixed term and then can adjust higher.

The significant difference in interest rates between 30-year fixed mortgages (around 6.1%) and 5/1 ARMs (currently near 5.3%), as reported by Cotality, is leading to considerable savings for buyers.

The greater the mortgage amount, the more substantial the savings an ARM provides during its initial low-rate period. But, with the median home price hovering around $400,000 and inventory still quite low, how beneficial is an adjustable-rate mortgage to the average prospective homebuyer? Is the risk worth the reward?

Understanding an Adjustable-Rate Mortgage

The biggest benefit to an ARM is that it starts out at a fixed, predetermined interest rate, likely lower than what you would get with a comparable fixed-rate mortgage. The biggest drawback? The rate adjusts after a specified initial period—usually three, five, seven, or 10 years, based on market indexes. If those indexes go up, your payment will go up, too. Sometimes way up! However, ARMs can be a strategic choice for borrowers who anticipate remaining in their homes for a shorter duration.

Adjustable-rate mortgages typically gain popularity when interest rates climb, but recent market activity has challenged this conventional wisdom. Even as mortgage rates dropped from 7% to below 6.5% in early 2025, the popularity of ARMs unexpectedly increased. They captured nearly 21% of the market, reaching their highest share in three years.

Adjustable-rate loans are less risky than in the past due to new rules implemented after the financial crisis to protect borrowers. These rules include interest-rate caps, which limit how much the rate can increase each term and over the life of the loan. Additionally, borrowers often must qualify for an ARM based on a higher potential rate, providing a buffer in their budget if rates do increase.

If you’re a more mobile or first-time homebuyer who wants to keep your long-term options open, an ARM's low introductory interest rate is certainly tempting. As long as you’re ready to move on before the introductory period ends, you’ll benefit from the advantage of making lower payments while you’re living in the home.

Can you refinance after an ARM term is over?

Some ARMs allow you to automatically take advantage of lower rates without the hassle and expense of refinancing.

However, one of the assumed risks and drawbacks is that, after the introductory term, payments and rates can rise substantially. Additionally, if market indexes go down, that doesn't necessarily mean your mortgage payments will, too.

When you’re ready to refinance, you can switch from an ARM to a fixed-rate loan, potentially lowering your interest rate, and create more predictable monthly payments. It's advised to refinance before your ARM's rate resets, though, if you anticipate a significant increase in mortgage rates to come.

There is also typically a prepayment penalty. You can't pay off your loan for the number of years specified in your agreement. So, if interest rates jump while you still have a prepayment penalty in place, you can't refinance or sell your home without incurring a huge cost.

The 5/1 Adjustable-Rate Mortgage

The 5/1 adjustable-rate mortgage (the most popular ARM out there) has what's called an introductory "teaser" rate that's lower than what you'll get with a fixed-rate mortgage.

The five-year ARM’s time frame is based on the common real estate advice from experts that homeowners need to stay put in their home for at least five years before selling to ensure they reach their break-even point.

Today, however, home appreciation has slowed compared with the last five years. The latest existing-home sales show that while home prices are up 3.8% in February 2025 compared with a year before, home prices appreciated just about 17.9% on average, according to data from Realtor.com®.

And the pace is continuing to slow.

So, in a nutshell, you’ll have to put in significantly more work to figure out the math of an ARM and how it could potentially affect your budget when choosing a variable-rate loan. Reach out to Wendy Hoekstra, Vice President of Retail Lending at (708) 946-2246 to discuss loan payment and interest rate scenarios.

 

About Yahoo Finance

Yahoo Finance is a leading financial news and data platform that provides real-time market quotes, news, analysis, and tools to help users make informed financial decisions. It offers coverage of stocks, markets, crypto, and personal finance, along with portfolio tracking, interactive charts, and research resources designed for both everyday investors and professionals.

About Lew Sichelman

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country.

About First Community Bank and Trust
First Community Bank and Trust is a privately-owned bank. Established in 1916 First Community Bank and Trust has been serving Beecher, IL, Peotone, IL and the surrounding communities for over 110 years. Our commitment to providing the best banking products and services is matched only by our outstanding customer service. We offer traditional community banking services, including mortgage, consumer, and commercial lending, as well as state of the art electronic banking services.

Press Contact:
Steve Koehn, Senior Vice President
First Community Bank and Trust
(708) 946-2246

 

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