Here's a number you're going to see a lot in 2026: 2.8%.
That was the average 30-year fixed mortgage rate in late 2020 and early 2021. Millions of homeowners locked in that rate. It felt like winning the lottery.
But here's the thing nobody told them: those rates aren't forever. They're fixed for 5, 7, or 10 years—not 30. Most of those loans were actually 5/1 or 7/1 ARMs disguised as "low fixed rates." The teaser period is ending right now.
I had a client, Lisa, who called me in a panic last week. "Michael, my rate is going from 2.8% to 6.4% next month. My payment is jumping $900. I can't afford that. What do I do?"
She's not alone. According to data from the Mortgage Bankers Association, around $1.2 trillion in adjustable-rate mortgages will reset this year. The average increase? Around 3.5 percentage points.
The ARM Reset Math
Let's use Lisa's numbers. She bought her Denver townhouse in early 2021 for $425,000. She put 10% down, took a 7/1 ARM at 2.8%. Her original loan was $382,500. Her initial payment? About $1,580 (principal and interest).
Now, after 5 years of payments, she owes about $335,000. Her rate is about to adjust to the current index plus margin—roughly 6.4%. Her new payment? Around $2,100. That's a $520 increase, not $900—she'd misestimated. Still brutal.
But here's the trap: many ARM holders think they have no options. They believe they must accept the higher payment. Or worse, they think they have to sell.
That's wrong. You have at least three paths.
Path 1: Refinance Into a New Fixed Rate
The most obvious solution. Lisa's credit score was 740, her home value had appreciated to $520,000, and her LTV was about 64%. She qualified for a 30-year fixed at 6.2%. New payment: about $2,050. That's $530 more than her old payment, but $50 less than the ARM reset.
Not a huge win. But here's where it gets interesting: she could also do a 15-year fixed at 5.7%. Payment would be about $2,780—higher, but she'd own the home free and clear at 54 instead of 69.
We ran the numbers side by side.
Path 2: Pay the ARM Reset but Make Extra Payments
Lisa could just accept the 6.4% rate on her existing ARM. But then she should pay as much extra as possible before the next reset (which would happen in 12 months if it's a 1-year adjustment). The ARM might adjust again—up or down—based on market rates.
I hate this option. You're at the mercy of the index. With inflation sticky and the Fed signaling no cuts in 2026, rates could go higher. I told Lisa to avoid this unless she planned to sell within a year.
Path 3: Cash-Out Refinance to Consolidate Debt
Lisa had about $25,000 in credit card debt at 22% interest. We looked at a cash-out refinance. She could take $30,000 out (paying off the cards and covering closing costs). Her new loan would be $365,000 at 6.3%. Payment about $2,260. That's $680 higher than her old payment—but she'd eliminate $25,000 of high-interest debt.
We calculated the net effect. Her total debt service (mortgage + credit cards) would drop from $1,580 (mortgage) + $600 (minimum credit card payments) = $2,180 to $2,260. That's only $80 more per month, and she'd pay off the credit cards immediately.
She chose Path 3. She said, “I can handle an extra $80 a month if it means no more credit card payments.”
The Break-Even Point
We also calculated the break-even for the cash-out refi. Her closing costs were $4,500. Her net monthly savings (after accounting for the extra mortgage payment but eliminating credit card interest) was about $200. Break-even: 22.5 months. She planned to stay in the home at least 5 years. It made sense.
The ARM trap is real, but it's not a trap you can't escape. You have options. The worst thing you can do is ignore the reset notice and hope it goes away.
Lisa closed her cash-out refi last week. She texted me: “I feel like I can finally breathe. No more credit card bills. And my mortgage is manageable.”
I will keep posting updates on this. Check back soon.
P.S. If you have a 2021-era ARM, pull out your closing documents. Find the adjustment date. Don't wait until the month before to start planning. Start now.
This article is for informational purposes. Mortgage rates and ARM indices change. Consult a loan officer for your specific situation.
Michael Harrington