The Wall Street Journal reports that a risky mortgage option from the last housing bust is making a comeback: adjustable-rate mortgages. More homebuyers these days are opting for ARMs—loans that start with lower rates than traditional fixed-rate mortgages, but can rise after a set period, according to stats from the Mortgage Bankers Association. They accounted for roughly 10% of mortgage applications in early October, the highest share since 2023. By contrast, only 3% of buyers sought ARMS in early 2021, when interest rates were at historic lows.
The risk? When an ARM resets—typically in three to 10 years—monthly payments can jump if rates have risen in the interim. Buyers are essentially betting that rates will instead go down, explains the Journal. And the initial decision can save real money on monthly bills, somewhere around $200 a month on a $400,000 loan, per CNBC. That's because the average rate on a 30-year fixed-rate mortgage today is 6.15%, but the rate on a five- or seven-year ARM is about 5.4%.
"We see more borrowers trying to get rates in the 5% range" to make their monthly payments more affordable, says Scott Bridges of Pennymac. "Typically with an ARM loan, that's one of the only ways you're going to get there." While dicier than standard loans, both stories note that today's ARMs are seen as less troublesome than those that helped fuel the 2008 foreclosure crisis, thanks in part to stricter lending standards and caps on how much rates can rise.
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