In spite of downwardly trending rates last year, adjustable-rate mortgage volumes increased, defying traditional logic that has been "turned upside down," according to analysis from Cotality.
Past history
As a result, ARMs, which initially come with lower rates than the 30-year average, albeit for a limited term, turned into the only viable option for some in the most expensive housing markets who wanted to purchase or move up, the real estate data provider said.
"For many, choosing an ARM is less about preference and more about necessity — a bridge to affordability that comes with the expectation of refinancing or managing higher payments in the future," Cotality's principal economist Archana Pradhan said.
The current gap between the 30-year fixed and 5/1 ARM is approximately 80 basis points, which would bring savings of nearly $500 per month on a $1 million loan.
"For many people, that isn't just a nice discount — it's the only way they can qualify."
After beginning 2025 hovering near 7%, the 30-year fixed rate slid down and fell below 6.5% by September before finishing the year at 6.19%. Yet ARM interest rates increased, Cotality showed. The dollar share of conventional adjustable-rate originations relative to total volume headed in the opposite direction from 15.5% to 20.5% in December, the highest mark in three years.
Similarly, the percentage of conventional ARM originations by unit also climbed up from an approximately 9% share to 11% over the 12-month period.
Where the most ARMs are originated
The uptick in adjustable-rate mortgage demand was most pronounced in the markets where affordability is the hardest to come by, Cotality said.
In California, ARMs exceeded 31% of mortgage originations in 2025. At the same time, the District of Columbia and Massachusetts also saw growth surge to 28% and 24% of volume.
Similarly, the analysis found elevated ARM activity occurring among luxury and high-end property transactions. The percentage of total conventional ARM originations with balances above $1 million drifted between 45% and 49% in the latter half of 2025.
Is history in danger of repeating itself?
ARM interest among consumers spiked in 2022 and 2023 after interest rates on 30-year fixed-rate mortgages more than doubled from approximately 3% within a short time period, even nearing 8% at one point. At the time, some in the mortgage industry espoused the "marry the house, date the rate" strategy, suggesting buyers could refinance their 30-year fixed once rates eventually dropped again.
Geopolitics and a robust economy failed to respond accordingly, though, and more than three years later, the 30-year fixed rate remains near 6%. Consistent drops in recent months briefly led it back under 6% before the
"The bet is that today's dip is only the start of a downward trend, or that they are choosing available cash in the short term over a guarantee of consistent payments down the road," Pradhan said about today's ARM borrowers.
However, a 2024 study by home equity investment platform Point found close to 70% of ARM borrowers both in the fixed and variable stages of their loan
Yet even those aware of a potential increase were caught surprised by the rapid rate acceleration earlier this decade, pointing to the risks ARMs pose when used as an affordability strategy.
Still, the recent dip brought in a number of refinance transactions, and
At the same time, while the typical U.S. homeowner remains on solid financial footing, recent research has found higher levels of delinquencies among segments of borrowers, many of whom originated their mortgages after 2022.
While modern ARM products issued today come with greater market protections than past iterations of them, borrowers' need for the loans may serve as a reflection of the state of housing affordability today. Longer-term rate stability has been replaced by short-term cash flow survival at the moment but also could revert to past norms in time, according to Cotality.
"If and when 30-year fixed terms become more competitive, the market would likely pivot back," Pradhan said.
