ARM Rate Flows: 7/1 at 5.79%, 10/1 at 5.97%, and the Refinance Engine

The competitive landscape is defined by a persistent discount. The national average 5/1 ARM rate is 5.40%, offering borrowers a clear ~0.8% savings over the 30-year fixed rate of 6.23%. This gap is the core driver for ARM adoption, as it directly lowers initial payments and frees up capital for other uses. The flow favors ARMs when this spread is wide, and it remains a significant incentive for those planning to move or refinance before the rate resets.

The Fed's recent policy stance has halted the recent downward flow in rates. In late January, the central bank held its benchmark rate steady, citing slightly elevated inflation and stabilizing unemployment. This decision, combined with the MBA's forecast for a narrow 6.0% to 6.5% range for 30-year fixed rates, implies limited upside for fixed rates and thus caps the potential for wider ARM spreads. The market is now in a holding pattern, with the current discount being the key variable for borrower choice.

The Liquidity Engine: Refinance Volume and Borrower Behavior

The refinance engine is firing. National data shows 5/1 ARM refinance volume is up 12% year-over-year. This growth is the direct flow from borrowers seeking to lock in the current discount, with the 5/1 ARM offering a clear ~0.8% savings over the 30-year fixed. The volume surge indicates a steady pipeline of borrowers actively using the ARM's low introductory rate to lower their monthly payments.

A large cohort of Millennial and Gen Z homeowners are extending their stay in starter homes, creating a deep pool of potential ARM refinance candidates. These borrowers often plan to move before the rate resets, making the 5/1 ARM's initial period a perfect fit. The flow is sensitive to the SOFR index, with payments adjusting every six months after the initial fixed period, which keeps the risk profile and borrower calculus clear for those in this group.

Catalysts and Risks: The Next Flow Shifts

The immediate catalyst for a break in the current range is a shift in Fed policy. The central bank's recent "holding pattern" forecast, citing slightly elevated inflation and stabilizing unemployment, caps near-term movement. The next major data point is the FOMC's meeting on March 17-18, where a change in tone or projections could immediately impact the entire mortgage rate curve, including the ARM discount.

Spring is the other key catalyst. The spring homebuying season just weeks away could drive a seasonal flow surge in purchase ARMs, competing directly with the existing refinance engine. This would test the market's capacity to absorb new ARM volume without a rate spike.

The primary risk is a sustained rise in the SOFR index. Since ARM payments adjust every six months after the initial fixed period, a sharp increase in the index would trigger payment shocks. This could reverse the recent flow into ARMs, as borrowers face higher costs and the initial discount loses its appeal.