The Fed just cut rates again. Down to 3.75%-4%.

And you know what happened to mortgage rates? They went up.

Yeah, you read that right. The Fed cuts rates, and 30-year fixed mortgages jumped 20 basis points. They’re sitting at 6.3% now.

So what’s going on? And more importantly, what are you supposed to do about it?

The Thing Nobody’s Talking About

Everyone’s obsessed with 30-year fixed rates. I get it. Fixed rates feel safe. Predictable. Your payment stays the same for 30 years no matter what happens.

But here’s what most people don’t know – there’s another option that could save you serious money right now.

Adjustable-rate mortgages. ARMs.

I can already feel you tensing up. “Wait, aren’t those the things that caused the 2008 crash?”

Let me explain why that’s not the full story.

ARMs in 2008 vs ARMs Today

Back in the mid-2000s, ARMs made up 35% of all mortgages. Lenders were giving them to anyone with a pulse. Bad credit? No problem. No income verification? Sure, why not.

That was insane. And it blew up in everyone’s face.

But things are completely different now.

Today’s ARMs are “pretty stringently underwritten,” according to the Mortgage Bankers Association. You need solid credit. Real income. Actual down payment. These aren’t the wild west loans from 2008.

In fact, ARM borrowers today tend to have higher credit quality than fixed-rate borrowers. They’re typically used for larger loan amounts by people who know what they’re doing.

Here’s Why ARMs Actually Make Sense Right Now

The average rate on a 5/1 ARM is about 5.55% right now.

That’s a full 0.75% lower than fixed rates.

Let’s do some quick math. On a $500,000 loan:

• 30-year fixed at 6.3%: $3,090 monthly payment
• 5/1 ARM at 5.55%: $2,850 monthly payment

That’s $240 a month. Almost $3,000 a year. $14,400 over five years.

And here’s the kicker – most people don’t keep their mortgage for 30 years anyway. The average person moves or refinances every 5-7 years.

So why are you paying extra for a 30-year rate you’re never going to use?

How ARMs Actually Work

A 5/1 ARM means your rate is fixed for the first 5 years. After that, it adjusts once a year based on market rates.

But – and this is important – there are caps on how much it can increase. Usually it’s capped at 2% per year and 5-6% over the life of the loan.

So even in the worst case scenario, you’ve got protection.

And remember, these loans are tied to the prime rate and Fed funds rate. When the Fed cuts rates (like they just did), ARMs benefit directly. Your rate could actually go down after year five.

Who Should Consider an ARM?

You should think about an ARM if:

You’re planning to move in 5-7 years. Lot of people do this. Buy a starter home, build equity, upgrade later. If that’s your plan, why pay for 30 years of fixed-rate protection?

You think rates will drop. If you believe rates are coming down in the next few years, an ARM lets you take advantage of that. You can always refinance to a fixed rate later if rates drop significantly.

You want lower payments now. Maybe you’re expecting income growth. Maybe you’re willing to take some calculated risk for immediate savings. That $240 a month could go toward building an emergency fund or paying down other debt.

You’re buying expensive property. ARMs are often used for jumbo loans because the savings are even bigger on larger amounts.

The Fed Cuts, But Mortgage Rates Don’t Always Follow

Here’s something that frustrates people. The Fed just cut rates to 3.75%-4%. So why didn’t mortgage rates drop?

Because mortgage rates don’t directly follow the Fed funds rate.

30-year mortgages are tied to 10-year Treasury yields and broader economic conditions. The market had already priced in the Fed cut. Then Fed Chair Powell said December’s rate cut isn’t guaranteed, and mortgage rates actually went up.

This happens all the time. The Fed cut rates in September too, and the same thing happened – mortgage rates briefly dropped before the meeting, then jumped after Powell’s press conference.

But ARMs? They respond faster. They’re pegged to the prime rate, which tracks the Fed funds rate more closely. When the Fed cuts, ARM rates typically drop within days or weeks.

What About HELOCs?

If you’re a current homeowner, home equity lines of credit work the same way. They’re tied to the prime rate.

The Fed cuts rates, and your HELOC rate adjusts almost immediately. Usually within one or two billing cycles.

So if you’ve been sitting on home equity and thinking about tapping into it for renovations or debt consolidation, now might be the time. We’ve talked about how Fed rate cuts impact your options – the savings can add up fast.

The Risks You Need to Know

I’m not going to sugarcoat this. ARMs come with risk.

Your rate could go up after the fixed period ends. If rates spike in five years, your payment increases. That’s the tradeoff for the lower initial rate.

You need to be honest with yourself:

• Can you afford a higher payment if rates go up?
• Are you actually going to move or refinance in 5-7 years?
• Do you have stable income?

If you’re stretching to afford the house at the ARM rate, it’s probably not the right move. You need breathing room in your budget for potential rate increases.

What The Experts Are Saying

Brad Houle from Ferguson Wellman Capital Management calls ARMs “an underappreciated opportunity” right now.

His take? If you’re betting on rates coming down in 2026, ARMs might be a great “bridge tool.” You get lower rates today with the plan to refinance in 12-24 months when fixed rates hopefully drop.

But he’s also clear – you need to thoroughly understand the risks before jumping in.

The December Meeting Changes Everything

The Fed meets again December 9-10. They might cut rates again. Or they might not.

Powell made it pretty clear – December’s cut isn’t guaranteed. There’s “a growing chorus” among Fed officials to wait before cutting again.

Traders went from 90% confidence in a December cut down to 67% after Powell’s comments.

What does that mean for you? Uncertainty. Rates could stay elevated longer than people hoped.

Which actually makes the ARM argument stronger. If fixed rates stay high, that spread between fixed and adjustable rates stays wide. The savings stay significant.

My Honest Take

ARMs aren’t for everyone. They’re not magic. They come with real risk.

But for the right person in the right situation, they’re one of the smartest moves you can make right now.

You save money immediately. You get lower payments. You maintain flexibility. And if rates do drop, you can refinance to a fixed rate and lock it in.

The 2008 trauma is real. People remember what happened. But today’s ARMs are fundamentally different products with much stronger protections.

Back in 2018, we talked about how Fed rate hikes impact you. Now we’re in the opposite situation – the Fed’s cutting rates. But the principle is the same: you need to understand how these moves affect your actual options, not just what the headlines say.

What You Should Do

Talk to someone who actually knows this stuff. Don’t just go with what feels safe.

Run the numbers on your specific situation. Compare fixed vs ARM. Look at the monthly savings. Think about your real timeline. Be honest about your risk tolerance.

ARMs aren’t the default choice for most people. But they’re a legitimate option that could save you thousands of dollars if they fit your situation.

The Fed’s cutting rates, but fixed mortgage rates aren’t following. That gap between what the Fed’s doing and what’s happening with mortgages? That’s creating an opportunity for people who are paying attention.

Don’t let old fears about ARMs from 2008 prevent you from exploring something that might actually work for you in 2026.

Want to talk through whether an ARM makes sense for your situation? Drop a comment or reach out. Let’s look at your actual numbers, not just theory.