5-Year ARM Rates Hold at 7.42% as Fixed-Rate Mortgages Dominate 92% Market Share

The average interest rate for 5-year adjustable-rate mortgages (ARMs) in the United States stood at 7.42% as of August 1, 2025, according to Zillow, a prominent real estate marketplace [1]. This rate is part of a broader trend where ARMs continue to offer alternative financing options for homebuyers, despite fixed-rate mortgages remaining the dominant choice for over 92% of mortgage holders [1].

ARMs operate with a fixed interest rate for an initial period—such as three, five, seven, or 10 years—after which the rate adjusts periodically based on benchmark indices like the Secured Overnight Financing Rate (SOFR) [1]. Lenders also apply a fixed margin to the index, and loan agreements often include rate caps to limit how much the interest rate can increase over time. For instance, the current 7-year ARM rate is 7.49%, slightly higher than the 5-year rate [1].

While fixed-rate mortgages provide predictable monthly payments, ARMs can offer benefits in specific scenarios. Homebuyers purchasing temporary or starter homes might find ARMs advantageous if they plan to sell before the adjustment period begins. Similarly, real estate investors may use ARMs to leverage lower initial rates and adjust rental income or flip properties when rates reset [1]. In periods of high interest rates, ARMs may also provide lower upfront costs, assuming market conditions improve by the time the fixed period ends.

However, ARMs come with risks. Once the initial fixed period ends, monthly payments can increase significantly if interest rates rise. For example, if a $400,000 loan's interest rate were to jump from 7% to 12%, the monthly payment would increase by 54.6% [1]. This uncertainty can make it challenging for borrowers to compare ARM offers, as multiple factors influence the total cost.

For those currently holding ARMs, refinancing to a fixed-rate mortgage is a viable option. Many borrowers refinance when they decide to stay in their homes long-term, particularly as younger generations struggle to afford upgrades and remain in starter homes longer than anticipated [1]. The refinancing process is generally straightforward and similar to refinancing fixed-rate mortgages.

ARMs also have distinct advantages, such as potentially lower initial interest rates and reduced borrower requirements due to lower initial payments. In favorable market conditions, monthly payments could even decrease if rates fall [1]. However, the trade-off is the potential for increased payments and reduced financial stability compared to fixed-rate loans.

In summary, while ARMs remain a niche product, they continue to serve specific use cases, especially in a high-interest-rate environment. Prospective borrowers should carefully assess their long-term financial goals and risk tolerance before choosing an ARM. As market conditions evolve, the balance between ARM and fixed-rate mortgage adoption may shift, making it essential for homebuyers to stay informed and seek professional guidance when necessary.

Source: [1]Current ARM mortgage rates report for Aug. 4, 2025 (https://fortune.com/article/current-arm-mortgage-rates-08-04-2025/)