Borrowers are walking away from riskier loans because the savings are no longer worth it. ARMs carry more risk for borrowers because their interest rates can change after an initial period, though they typically start with a lower rate. However, the difference between ARM rates and 30-year fixed rates has been narrowing.
The rate on a five-year ARM climbed last week, while the rate on a 30-year fixed loan actually dipped. That squeeze has driven ARM demand to its weakest level since January.
An ARM is seen as a higher-risk loan since its interest rate adjusts periodically based on current market conditions once the initial fixed term ends. Fixed-rate mortgages lock in a steady payment for the life of the loan. For months, ARMs were popular because they were much cheaper upfront. But the gap has narrowed like a zipper closing tight.
The five-year ARM rate climbed to 5.79%, up from 5.68% the previous week. At the same time, the average rate on a 30-year fixed loan fell to 6.57% from 6.59%. The spread between the two is shrinking.
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Borrowers now face a smaller reward for taking on the risk of a future rate reset. As a result, ARMs made up only 7.6% of all mortgage applications last week - down from 9.6% in mid-May.
The Mortgage Bankers Association (MBA) reported that total mortgage application volume increased by a mere 0.04% compared to the prior week. That tiny gain came from a 1% increase in purchase applications, which offset a 1% drop in refinance applications. Compared with the same week one year ago, purchase apps are up 3% and refinance apps are up 9%.
Commenting on the data, Joel Kan, the MBA's deputy chief economist and vice president, stated, "Mortgage rates eased slightly last week as oil prices declined. As a result, mortgage applications increased modestly, with an uptick in purchase activity offsetting a smaller decline in refinances."
Kan also noted that buyers are sticking around even as rates stay elevated, adding, "Purchase applications remain ahead of 2025's pace and have exhibited year-over-year growth for almost three months, as prospective homebuyers are finding opportunities in markets with ample inventory and easing home-price growth."
Adjustable-rate mortgages lure borrowers with lower initial payments, but that advantage comes with a trade-off: once the fixed period ends, the rate can rise with the market. For much of 2025, the typical ARM offered a sizable discount over a 30-year fixed loan. That gap has recently narrowed to less than a percentage point, making the risk less appealing.
Homebuyers who might have chosen an ARM to afford a larger purchase are now opting for the certainty of a fixed rate, especially as inflation concerns keep long-term rate expectations volatile. The current 7.6% ARM share is well below the 10% threshold often seen when borrowers aggressively chase lower upfront costs.
Purchase applications have been running ahead of the prior year's pace for nearly three months. As Kan noted, "prospective homebuyers are finding opportunities in markets with ample inventory and easing home-price growth." Still, overall mortgage demand remains very sensitive to small rate moves and economic uncertainty.
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