By Shaina Mishkin
Lower mortgage rates are here -- if you know where to look. Adjustable-rate mortgages, or ARMs, could become more popular as the yield curve steepens.
For many home buyers, this spring will look a little less intimidating than it did last year: Price gains have cooled, with declines in some parts of the U.S. The rate on a fixed 30-year mortgage is nearly a full point lower than it was at the same time last year, according to Freddie Mac. And buyers in some parts of the country, particularly those in which new construction is plentiful, will find they have more options.
But buying a home is still significantly more expensive than it was before the pandemic or during the housing market's pandemic boom days. Zillow in December estimated the typical monthly mortgage payment, assuming a 10% down payment, at roughly $2,180 -- down about 5% from one year prior, but 63% higher than the same month in 2021.
House hunters who aren't considering an adjustable-rate loan could be missing out on cheaper financing costs, according to Stephen Kim, an Evercore analyst covering home builders. "Home buyers shouldn't underestimate the kind of firepower they can gain by 'adjusting' their mortgages," he wrote in a Friday note.
Fixed-rate loans have long been a popular choice for buyers, in part for their predictability. The product allows borrowers to lock in principal and interest costs for the life of the loan. ARMs, on the other hand, lock in interest costs for a set period -- often five, seven, or 10 years -- after which they adjust on a regular schedule.
Buyers have had little need to investigate ARMs in recent years. Fixed 30-year mortgage rates were lower than 5% in the years immediately preceding the pandemic, and fell as low as 2.65% in the years that followed. In the aftermath of the 2008-09 financial crisis, "ARMs all but disappeared because fixed rates were so low that buyers had no difficulty affording homes," Kim noted.
But a steepening yield curve is changing the math -- and giving buyers significantly lower rates on adjustable loans than fixed. Mortgage News Daily on Friday pegged the average 7/6 SOFR ARM rate at 5.61%, compared with a 30-year fixed-rate reading at 6.16%. Adjustable-rate loans represented 7% of all first-lien purchase loan rate locks during the week of Jan. 23, the largest share since May, according to ICE Mortgage Technology.
"If the yield curve steepens, ARMs could become more appealing, and we could see more consumer interest in 2026 and beyond," Bill Banfield, Rocket Mortgage's chief business officer, told Barron's. "For now, the 30-year fixed mortgage remains the dominant option and is still what most ask for when buying or refinancing a home."
Unlike the 30-year fixed-rate mortgage, which moves based on long-term Treasury yields, adjustable mortgage rates move based on the Secured Overnight Financing Rate, or SOFR, Barron's previously reported . That pricing means ARM rates can move when fixed-rate mortgages don't, says John Toohig, Raymond James' head of whole loan trading.
"If we get into this world where we continue to cut [short-term rates] -- hopefully we get a couple of cuts this year -- ARMs, in theory, should see rates go lower, even if the 10-year [Treasury yield] kind of stays stubbornly high," Toohig says.
Political appetite for lower interest rates could help, Kim wrote in his note -- to builders' benefit. "If the administration's efforts to push down the short end of the yield curve prove successful, ARM share could explode to the upside and help the builders put meat on the table," the analyst noted.
The trade-off for buyers seeking a lower rate is that ARMs come with more strings and perceived risks than fixed-rate loans. "The appeal of an ARM, in many ways, is the lower fixed-rate cost for that period of time," says Eric Hagen, BTIG's specialty finance analyst -- "the flip side being that it's a little bit riskier."
Some of that reputation for risk is a holdover from the financial crisis, when lending standards were significantly looser than now. Today, "there is nothing like what we saw back in the day," says Raymond James' Toohig.
The main risk for borrowers considering an ARM is that interest rates move higher in the future, leading to heftier payments down the line. It's still wise for a borrower to evaluate their best-, worst-, and base-case scenarios before taking out an ARM, says Keith Gumbinger, the vice president of mortgage information website HSH.com.
"A borrower who takes an ARM at the moment with an eye toward either a lower rate coming in the future or that an opportunity to refinance to a lower fixed rate will present itself needs to be fully prepared that neither may turn out to be the case," Gumbinger says. "There's a risk that a homeowner might end up stuck in an ARM adjusting to a higher interest rate."
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 02, 2026 02:30 ET (07:30 GMT)
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