ARM or 30-Year Fixed? The Loans DC Buyers Are Weighing at 7%

One in ten mortgage applications is now an adjustable-rate loan, the highest share in a year. That is not a fad. It is buyers doing arithmetic. The 30-year fixed crossed 7.4% this month, and an ARM starts about a point lower.

A lower starting rate is not the same as a cheaper loan. Each alternative to the 30-year fixed trades one risk for another, and the right trade depends on one question more than any other: how long will you keep this loan? Here is what each option costs and what it risks. Every example is an $800,000 loan, the loan on a $1M house with 20% down.

Start with what the 30-year fixed buys you

At 7.41%, the rate in the Mortgage Bankers Association's latest weekly survey, the payment on $800,000 is $5,544 a month for principal and interest. It never changes. If rates fall, you can refinance. If they rise, you are protected for thirty years. The fixed rate is insurance, and you pay for it in the rate. Every other option on this list gives some of that insurance back in exchange for a lower number today.

Know what an ARM saves before it resets

An adjustable-rate mortgage holds a fixed rate for an opening period, then resets. The common versions are the 5/6, the 7/6 and the 10/6. The first number is the fixed years. The 6 means the rate resets every six months after that, to a market index called SOFR plus a set margin.

The same survey put the five-year ARM at 6.46%. On $800,000 that is $5,036 a month, $508 less than the fixed. Over the five fixed years, that is about $30,500 kept.

Now the other side. Caps limit how far the rate can move. On a typical 5/6, the first reset can rise up to 2 points, each later reset up to 1, and the lifetime cap is 5 points over the start. If rates are higher in five years, your 6.46% can become 8.46% at the first reset. On the balance left by then, about $749,000, the payment rises to about $6,010. At the 11.46% lifetime cap, it would be about $7,590.

Here is the part that surprises buyers. A five-year ARM lowers your payment, but it may not raise the price you qualify for. On a conforming 5/6, the lender qualifies you at the higher of the start rate plus 2 points or the fully indexed rate. At 6.46% that means qualifying at 8.46%, about $6,130 a month, more than the fixed. A 7/6 or 10/6 qualifies at the start rate, so the longer ARMs do more for buying power.

An ARM fits a buyer who expects to sell or refinance before the reset: a planned move, a job with an end date, a family that will outgrow two bedrooms. It is a bet when the plan is to refinance because rates should fall. They may. Your income, your credit and the house's value all have to cooperate on the day you need them to.

See what a 15-year fixed costs and what it saves

The 15-year fixed averaged 6.68% in Freddie Mac's latest survey, against 7.32% for the 30-year. On $800,000 the payment is $7,048 a month, about $1,550 more than the 30-year at $5,495. In exchange, you pay about $469,000 in interest over the life of the loan instead of about $1.18 million. This is not a way around high rates. It is a way to pay less for them, if the higher payment fits with room to spare.

Buy the rate down, for a year or for good

A 2-1 buydown. The rate is cut 2 points in year one and 1 point in year two, then returns to the full rate. At 7.32%, the payment drops to about $4,450 in year one and $4,960 in year two, against $5,495. The cost is the payment difference paid up front, about $19,000 on this loan. Sellers can pay it: with 20% down, Fannie Mae allows seller-paid costs up to 6% of the price. You still qualify at the full rate.

A permanent buydown. You pay points at closing for a lower rate for the life of the loan. One point is 1% of the loan, $8,000 here. If it buys a quarter point, the payment falls about $135 a month, and you break even in about five years. Sell or refinance before then and the points were a loss.

A temporary buydown is a bridge, not a solution. Budget for the full payment from the first day, and treat the first two years as a cushion.

Take over the seller's rate, if the seller has the right loan

FHA and VA loans can be assumed. A buyer who qualifies takes over the seller's loan, rate and all. A seller who borrowed at 3% in 2021 can hand that rate to you, and most conventional loans cannot be passed on this way.

The catch is the gap. You take over only what the seller still owes. If the house sells for $1M and the balance is $600,000, you need $400,000 in cash or a second loan at today's rates. The servicer has to approve you, and it can take weeks longer than a new loan. On a VA loan, the seller's entitlement can stay tied to the house unless the buyer is a veteran who substitutes their own. Ask whether a listing has an assumable loan. Few sellers advertise it.

Check the loan limit before you compare rates

In DC, a loan up to $1,249,125 is conforming in 2026, and FHA loans go to the same limit. Above that, the loan is a jumbo, with its own rates, ARM terms and down payment rules from each lender. On a DC row house above about $1.56M with 20% down, you are shopping jumbo loans, and the numbers in this article are a starting point, not your quote.

If you are selling: offer the payment, not just the price

A $19,000 price cut lowers a buyer's payment by about $104 a month. The same $19,000 spent on a 2-1 buydown lowers it by about $1,040 a month in year one and $533 in year two. To a buyer watching the monthly number, those are different offers. If your own loan is FHA or VA, find out whether it is assumable and what you owe. That rate may be worth more to the right buyer than any repair.

How I would choose

I would start with the hold period. Under five years, the ARM and the temporary buydown deserve a hard look. Seven to ten years, the 7/6 or 10/6. Longer than that, the fixed, with points if the break-even comes well before you expect to move. I would have the lender run every option at its worst case, not its best. Then I would pick the one I could live with if rates go the wrong way.

Choose the loan for how long you will keep it, not for this year's rate.

A note on what this is. I am a real estate agent, not a financial advisor or a loan officer. This article explains how these loans generally work, using this month's published averages. It is not advice about your loan. Rates, caps, qualifying rules and costs vary by lender and by borrower, and your terms should be in writing. Talk with your lender, and a financial advisor if you have one, before you choose.