Last updated: November 2025
Quick Answer
When mortgage rates are falling, an adjustable-rate mortgage (ARM) can offer lower initial payments and the potential for future rate drops. However, a fixed-rate mortgage provides payment stability and long-term predictability. The best choice depends on your financial goals, how long you plan to stay in the home, and your risk tolerance.
Compare ARM and Fixed options for your situation. Start with GO Mortgage.
Understanding the difference between adjustable-rate and fixed-rate mortgages
The difference between adjustable-rate and fixed-rate mortgages lies in how your interest rate is set and how it can change over time.
- Fixed-rate mortgage: The interest rate stays the same for the entire loan term. Your monthly principal and interest payment never change
- Adjustable-rate mortgage (ARM): The rate is fixed for an initial period (commonly 5, 7, or 10 years), then adjusts periodically based on a financial index plus a margin
In a fixed-rate mortgage, you lock in today’s rate for the life of the loan. In an ARM, you might start with a lower rate and hope future adjustments stay favorable, especially relevant when mortgage rates are falling.
How falling mortgage rates affect your loan choice
When rates drop, your choice between these conventional mortgages can significantly affect your total interest paid and monthly payment.
In a falling rate environment:
- ARMs may adjust down after the initial fixed period, potentially lowering your payment
- Fixed-rate loans won’t change, even if the market offers lower rates later
- Refinancing a fixed-rate loan later is possible, but it adds cost and complexity
If current market trends point to further rate decreases, an ARM can provide greater flexibility and cost savings, particularly if you don’t plan to stay in the home long term.
Key features of ARMs vs. fixed-rate mortgages
| Feature | Adjustable-Rate Mortgage (ARM) | Fixed-Rate Mortgage |
|---|---|---|
| Initial interest rate | Lower than fixed-rate | Higher, but stable |
| Rate changes | Adjusts after fixed period | Never changes |
| Predictability | Low after adjustment period | High throughout loan |
| Monthly payment stability | Can increase or decrease | Always stays the same |
| Best use case | Short-term homeownership or falling rates | Long-term ownership or rising rate outlook |
| Refinancing risk | Lower (may not be needed) | Higher (may refinance to get lower rate) |
Loan comparisons like these help you understand why adjustable-rate mortgages may be more attractive in a falling rate environment—doubly so if your financial plan supports it.
When an adjustable-rate mortgage makes sense
An ARM is often the better choice in the following situations:
- You expect to move or sell the home within the first 5 to 7 years
- You believe interest rates will continue to drop
- You want to keep monthly payments lower early in the loan term
- You’re comfortable with future payment variability
In today’s market, ARMs offer starting interest rates that can be 0.50% to 1.00% lower than fixed-rate options. That difference could translate to thousands in savings during the initial period.
When a fixed-rate mortgage is the safer choice
A fixed-rate mortgage remains the best option if:
- You plan to own the home for 10 years or longer
- You value payment stability and predictability
- You are budgeting carefully and want to avoid any payment shock
- You expect rates to rise again in the medium to long term
Even in a falling-rate market, locking in a fixed-rate mortgage provides peace of mind if your financial situation depends on predictable payments.
Pros and cons of ARMs and fixed-rate mortgages
Adjustable-rate mortgage pros
- Lower initial interest rate
- Potential for rate decreases and lower payments
- Ideal for short-term homeownership
Adjustable-rate mortgage cons
- Interest rate may rise in the future
- Monthly payments may increase
- Uncertainty after fixed period
Fixed-rate mortgage pros
- Consistent monthly payment
- Long-term rate protection
- Easier long-term budgeting
Fixed-rate mortgage cons
- Higher initial rate than ARM
- May miss out on future rate drops
- Refinancing needed to benefit from lower market rates
Choosing between these mortgage types means balancing flexibility, payment risk, and future financial plans.
Current rate trends in 2025
Mortgage rates in 2025 have declined steadily following Federal Reserve policy shifts and slowing inflation. As of November 2025, average fixed rates are near 6.25%, while 5/1 ARMs are often available around 5.75% or lower.
This downward trend increases the appeal of adjustable-rate mortgages, as borrowers may benefit from future rate reductions after the initial fixed term.
However, mortgage professionals recommend reviewing all loan terms, including adjustment caps, index types, and margin values.
Factors to consider before choosing
Here’s what to review before deciding on an ARM or fixed-rate mortgage:
- How long will you stay in the home
- Your comfort with payment changes
- Available interest rate caps and margins
- Your credit score and debt-to-income ratio
- Potential refinancing needs
The right mortgage depends on your timeline and risk comfort
Choosing between an adjustable-rate mortgage and a fixed-rate mortgage in a falling rate environment depends on how long you plan to stay in your home and how much payment certainty you need.
An ARM can help you capitalize on short-term savings, while a fixed-rate mortgage offers predictable stability. If you’re weighing your options, GO Mortgage can help you find the loan structure that fits your plans now and in the future.
Kick off your mortgage application now and let a GO Mortgage expert match you with the best loan strategy for today’s market.
FAQ: ARM vs. fixed-rate mortgage
A: After the fixed period, if rates are lower than your initial rate and your ARM terms allow, your interest rate and monthly payment may decrease.
A: A fixed-rate mortgage locks in today’s rate, protecting you from future increases, but you won’t benefit from further rate drops unless you refinance.
A: ARMs carry less risk when rates are declining, but there’s still uncertainty after the initial period. Rate caps and adjustment formulas determine future payment amounts.
A: Yes, if market conditions and your credit allow, you can refinance an ARM into a fixed-rate mortgage at any point.
A: First-time buyers planning to sell or refinance in a few years may benefit from lower initial payments with an ARM, but they should understand the long-term risks.