Adjustable-Rate Mortgages Are Making a Comeback. Should You Consider One?
For years, the 30-year fixed-rate mortgage has been the default choice for American homebuyers. It is predictable, stable, and easy to understand. But in today's market, a growing number of borrowers are looking at an alternative that fell out of favor after the 2008 financial crisis: the adjustable-rate mortgage, or ARM.
ARMs now account for roughly 12% of all mortgage originations, a share that has been climbing as borrowers look for ways to reduce their monthly payments. So what is driving the renewed interest, and is an ARM the right move for you?
How an ARM Works
An adjustable-rate mortgage starts with a fixed interest rate for an initial period, typically 5, 7, or 10 years. After that introductory window, the rate adjusts periodically based on a market index, which means your monthly payment can go up or down.
The appeal is simple: the initial rate on an ARM is almost always lower than the rate on a 30-year fixed loan. Right now, the difference can be half a percentage point or more. On a $400,000 loan, that translates to roughly $120 to $150 less per month during the fixed period.
Why Buyers Are Choosing ARMs Again
The math is the main driver. With 30-year fixed rates near 6%, a 5/1 ARM might offer a starting rate in the low-to-mid 5% range. For buyers who are stretching to afford a home, that lower initial payment can be the difference between qualifying and falling short.
There is also a strategic argument. Many buyers do not plan to stay in their home for 30 years. The average American moves roughly every 7 to 10 years. If you expect to sell or refinance before the adjustable period kicks in, you could benefit from the lower rate without ever facing the uncertainty of an adjustment.
And today's ARMs are not the same products that contributed to the housing crisis. Modern ARMs come with rate caps that limit how much your rate can increase at each adjustment and over the life of the loan. The underwriting standards are far more rigorous than they were in the mid-2000s.
When an ARM Makes Sense
An ARM can be a smart choice if you plan to move or refinance within 5 to 10 years, if you expect your income to increase significantly in the near future, or if the rate savings during the fixed period meaningfully improve your monthly cash flow.
It can also work well for buyers in a declining-rate environment. If rates continue to fall over the next few years, your ARM adjustment could actually result in a lower payment, not a higher one.
When It Does Not
If you are buying your forever home and plan to stay for 20 or 30 years, the certainty of a fixed rate is hard to beat. The peace of mind that comes with knowing your payment will never change has real value, especially for families on a tight budget.
An ARM also carries risk if rates rise sharply during the adjustable period. While caps limit the damage, your payment could still increase by several hundred dollars per month at each adjustment.
The Bottom Line
ARMs are not for everyone, but they are no longer the risky products they were two decades ago. For the right buyer in the right situation, they can save thousands of dollars.
Wondering whether a fixed or adjustable rate makes more sense for your situation? Let's compare the options side by side. A quick analysis can show you exactly what each path looks like over the time frame that matters to you.