The Adjustable-Rate Mortgage Makes a Comeback in an Unaffordable Market

In the thick of economic uncertainty and high interest rates, adjustable-rate mortgages are making a comeback. 

ARMs offer cheaper fixed interest rates for the initial five, seven or 10 years, giving borrowers more options for homeownership. After that introductory period, the loan has a variable interest rate that could go up or down, depending on market conditions. 

The share of loan applications for ARMs recently rose to its highest level in 17 months, according to the Mortgage Bankers Association. 

These types of mortgages, often considered riskier than traditional fixed-rate options, haven’t been popular for a while. Maligned as subprime mortgage products during the 2008 housing market crash, they’ve been somewhat blacklisted since the Great Recession. 

Yet homebuyers, desperate to secure lower interest rates, are taking the gamble. Last week, as market turmoil over tariffs sent bond yields and mortgage rates higher, the interest rate for a 5/1 ARM was 50 basis points, or 0.5%, lower than a 30-year fixed mortgage, the most common home loan term. 

“In today’s high-price, high-rate market, 50 basis points can make a big difference in housing costs,” said Hannah Jones, senior economic research analyst with Realtor.com. According to Jones, a 6.5% rate instead of a 7% rate translates to roughly $110 monthly savings on the principal and interest payment on a median-priced home ($424,900 with a 20% down payment).  

Adjustable-rate loans have a more complex structure than traditional fixed-rate mortgages, but their fraught history gives them an unjustifiable bad rap. 

“Many of the risks that existed in the market back before the housing crash are long gone, and most had to do with loose underwriting standards,” Keith Gumbinger, vice president of HSH.com, said via email. 

According to Gumbinger, these mortgages aren’t evil or toxic but simply another type of mortgage product that could provide a more affordable gateway into homeownership. Like any other loan, the risk level depends on the lender’s disclosures and the borrower’s financial readiness. 

Adjustable-rate mortgages in an unaffordable market

Homes are expensive and in short supply, while real household wages are falling and borrowing rates remain costly. The interest rate on a 30-year fixed mortgage, which has more than doubled since early 2022, is expected to remain steep, around 6.5% to 7%, for most of 2025. 

As high interest rates make it prohibitively expensive for homebuyers to cover their monthly mortgage payment, ARMs offer the benefit of lower initial rates and more manageable monthly bills than standard long-term mortgages. 

The uptick in ARM applications may not become a durable trend. Still, taking on less debt (at least initially) gives buyers some agency in today’s housing market.  

“If [mortgage] rates remain high, then more people will continue to take advantage of the savings they can obtain with the adjustables, and then refinance when rates are lower,” said Melissa Cohn, regional vice president of William Raveis Mortgage. 

The longer-term outlook for mortgage rates also plays a role. Given expectations of Federal Reserve interest rate cuts, a potential economic downturn and lower inflation, mortgage rates could move lower over the next three to five years. 

In that context, Gumbinger said choosing an ARM provides some immediate financial relief, especially with the possibility of getting a cheaper adjustable rate or refinancing to a lower long-term fixed rate once the introductory period is up. 

Adjustable-rate loans aren’t as risky as they were

The mortgage market is more tightly regulated than it used to be. “Today’s ARMs are fully underwritten and fixed for a reasonable amount of time,” said Colin Robertson, who created The Truth About Mortgage site.

In the years before the housing crisis, ARMs made up the bulk of subprime mortgages. But back then, banks and lenders didn’t require proof of employment, assets or income. Homeowners with less-than-ideal credit histories were set up for trouble once they were hit with monthly payments they couldn’t afford after those teaser introductory rates expired.  

“Lenders have much more stringent creditworthiness requirements than roughly 20 years ago, when lax lending standards ultimately resulted in the housing market crash,” said Jones. 

Today, lenders must adhere to the ability-to-repay rule, which ensures borrowers are fully vetted with a low likelihood of defaulting on their home loans once the rate resets. In fact, Cohn said banks now ensure that ARM borrowers qualify for a higher adjusted rate, either the fully indexed rate or 2% higher than the cheaper introductory rate. 

Though the most considerable risk with ARMs is higher monthly payments after the five-, seven- or 10-year period is over, Gumbinger said today’s ARMs have mechanisms, including cap structures, to limit the negative consequences of interest rate increases. 

ARMs are best for certain types of borrowers

Buyers who want predictable payments or who intend to live in a home for the duration of their mortgage term wouldn’t benefit from an adjustable-rate mortgage. 

According to Cohn, ARMs are best suited for buyers seeking a starter home who don’t expect to live in the property long term. Borrowers who are confident that their income will grow or that interest rates will decline might also opt for an adjustable-rate mortgage.

Housing experts say borrowers considering this type of home loan should have a game plan to potentially refinance or sell once the interest rate adjusts. When taking out an adjustable-rate mortgage, it’s important to consider the worst-case scenario, like a future job loss alongside a much higher housing payment. 

“Households that can barely afford to purchase a home should steer clear. Adding the risk of a rate increase to an already tight budget can be financially risky,” said Jones.