Unlike traditional fixed-rate mortgages, ARMs offer a lower introductory interest rate for a set period, such as three, five or seven years. After this initial phase ends, the rate adjusts periodically based on market conditions and the loan’s terms. Although people with an ARM enjoy lower payments upfront, they’re gambling on future rate hikes.
The extreme spike in this group’s costs has to do with when they took out their loans. Thirty-year mortgages were dramatically lower at 3.5% in January 2020 versus today’s average of 7.4%, according to Freddie Mac. So, people who took out ARMs back then got exceptionally low rates.
When asked about the 2027 forecast for ARM holders, ICE’s Head of Mortgage and Housing Market Research, Andy Walden, told Moneywise, “The median borrower facing an initial ARM reset in 2027 should expect their payment to rise by $645 per month, roughly in line with the $545-to-$666 monthly increases faced by borrowers in similar positions entering each of the past three years.”
But that doesn’t mean ARM rate adjustments are always something to fear. Interestingly, some ARM holders will celebrate when their rates change.
When an ARM bet pays off
As the Fed kept raising interest rates to tackle inflation, mortgage rates climbed to a local peak in 2023 from their 2020 lows. Therefore, anyone who entered an ARM agreement at these elevated levels will actually see their rates fall a smidge.
As CNBC reported, borrowers with three-year ARMs that originated in 2023 began with a median rate of 8.38%. Even though mortgage rates are high today, these borrowers will see their median rate dip to a more manageable 7.71%, which translates to $124 in monthly savings.
While this $1,488 in yearly savings isn’t as dramatic as the $12,792 losses, it’s proof that ARM agreements aren’t inherently a “bad move” — they’re just more uncertain than their fixed-rate counterparts.
And it appears more homebuyers feel comfortable taking on the additional risk of an ARM to break into the housing market. ICE’s data showed that ARMs made up 11% of mortgage rate locks, reaching their largest share in nearly four years.
Although Andy Walden admitted this shows ARMs’ growing popularity as fixed-rate mortgages climb, he pointed out that they’re still relatively small at 5.6% of all active mortgages.
In an email to Moneywise, Walden said that “ARMs can be an attractive option, especially for borrowers obtaining higher-balance loans, as ARMs typically offer lower initial rates than a 30-year fixed-rate mortgage.” However, he cautioned anyone interested in these loans to research the fine print, saying, “The key is understanding the specific terms, including when the rate can first adjust and how much it can rise, so borrowers are comfortable with the higher payment if they are unable to refinance before their rate resets.”
