"ARMs Drop Slightly Amid Hopes for Fed Rate Cuts and Lower Mortgage Costs"

As of Aug. 29, 2025, the average rate on 5-year adjustable-rate mortgages (ARMs) in the U.S. stands at 6.95%, according to data from Zillow as of Aug. 26, 2025. This rate is a slight decline from the 7.02% reported the previous day, as noted by Zillow on Aug. 25. Meanwhile, the average rate for 7-year ARMs remained steady at 6.63%. These rates reflect the dynamic nature of ARM products, which are tied to benchmark indices like the Secured Overnight Financing Rate (SOFR), and are subject to adjustments after an initial fixed period. Lenders typically add a margin—often ranging from 2% to 3.5%—to the index to determine the final rate for borrowers [1].

ARMs continue to offer a compelling alternative to fixed-rate mortgages, particularly in high-interest environments. As of late August 2025, the average rate for 30-year fixed-rate mortgages in the U.S. was reported at 6.68% by the Mortgage Bankers Association (MBA). In comparison, the average rate for 5/1 ARMs was 6.01%, resulting in a savings of over $200 per month on a $300,000 mortgage. This discrepancy highlights the appeal of ARMs for borrowers who anticipate selling or refinancing before the adjustment period begins or who expect market conditions to improve. Analysts point to the Federal Reserve’s anticipated rate reductions later in the year and into 2026 as a potential driver for future declines in ARM rates [2].

Despite the lower initial rates, ARMs come with inherent risks. Market conditions and broader economic factors—such as geopolitical developments, supply chain disruptions, and inflationary pressures—can influence ARM rates during adjustment periods. For instance, in the Canadian market, concerns over mortgage defaults and foreclosures have intensified as households face higher renewal costs. The Bank of Canada estimates that approximately 60% of households renewing mortgages in 2025 and 2026 will face higher payments, with an average increase of about 10%. This trend has contributed to a gradual rise in delinquency rates, particularly in Ontario and British Columbia [3].

In the U.S., ARM structures remain diverse, with common options including 5/1 ARMs (a fixed rate for five years followed by annual adjustments) and 10/6 ARMs (a fixed rate for 10 years with adjustments every six months). The flexibility of these structures allows borrowers to tailor their mortgage strategies based on financial goals and market expectations. Additionally, many ARMs include rate caps that limit the extent of rate increases during each adjustment period and over the life of the loan. These caps provide a level of protection against significant payment shocks [1].

For those considering an ARM, the decision often hinges on personal financial circumstances and long-term plans. Short-term homeowners, real estate investors, and those entering the market during high-interest periods may find ARMs advantageous. However, borrowers with variable or uncertain incomes may find the unpredictability of ARM payments more challenging. Refinancing from an ARM to a fixed-rate mortgage is an option for those whose plans change, although it requires a thorough evaluation of current financial conditions and market trends [1].

Source:

[1] Current ARM mortgage rates report for Aug. 27, 2025 (https://fortune.com/article/current-arm-mortgage-rates-08-27-2025/)

[2] Is now a good time to get an adjustable-rate mortgage (ARM)? (https://finance.yahoo.com/personal-finance/mortgages/article/is-now-a-good-time-to-get-an-adjustable-rate-mortgage-arm-130050893.html)

[3] Mortgage Defaults and Foreclosures Rise With Elevated (https://www.nesto.ca/real-estate/mortgage-defaults-foreclosures-canada/)