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 suggests ARM volume should have fallen as fixed rates dipped throughout 2025 to alleviate pressure on housing costs. The percentage of adjustable-rate loans among conventional originations grew, though, on a dollar-volume basis, with home affordability still posing challenges.

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.

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.