Adjustable-Rate Mortgage Trends in 2024

Adjustable-Rate Mortgages Associated With Rate Uncertainty

ARMs have traditionally been a way for home borrowers to obtain manageable monthly mortgage payments that in many cases wouldn’t be affordable with a conventional 30-year mortgage.

After a fixed-rate period—often five years, though that can vary—subsequent interest changes periodically throughout the remainder of the loan. In other words, the mortgage becomes a variable-rate mortgage after its introductory fixed-rate period ends. After the introductory period, some ARM borrowers may then decide to refinance the remaining balance into a fixed-rate mortgage, if rates have fallen since they bought their home.

But a combination of current interest rate gyrations, as well as memories of ARMs going sideways during the housing crash that began in 2006, gave many current borrowers—some of whom may have experienced a prior foreclosure—pause when considering how to finance a home purchase. Those past experiences were evidently still enough to cloud homebuyer decisions even as conventional mortgage rates scraped 7% earlier in 2024.

Fixed and Adjustable Mortgage Rates

Learn more >> What’s the Difference Between Fixed-Rate and Adjustable-Rate Mortgages?

ARMs and Future Flexibility

Adjustable-rate mortgages, despite their relative unpopularity, still offer some homeowners options when it comes to refinancing. Consider the three possible scenarios for a new ARM-based mortgage payer:

1. Interest rates fall. ARM borrowers can consider refinancing into a fixed-rate mortgage, which may be lower than the rate on their current ARM. Currently, mortgage rates are still well above 6%, but they have fallen a percentage point over the past year. If rates continue to fall, recent ARM borrowers may be soon looking to refinance.
2. Mortgage interest rates are not appreciably higher or lower than the ARM-based mortgage after five years. In this case, the borrower can continue paying the reset interest rate terms, or may consider refinancing the remaining balance into a fixed-rate mortgage.
3. Interest rates rise. Interest rates that are currently well above pandemic-era levels may be informing why some current ARM mortgage payers are, according to one survey, regretful about their decision to finance their mortgage with an ARM. ARMs due to reset in the past two years have reset to higher rates, thus increasing monthly mortgage payments. But by the time an ARM rate resets, homeowners are likely to have accumulated additional home equity, and may find fitting the remaining balance into a fixed-rate mortgage more attainable than when they assumed the ARM five years ago.

Learn more >> Should You Get an Adjustable-Rate Mortgage?

ARMs: Bad Memories and Real Yields

Here’s a hypothetical choice a prospective homebuyer may have today. Consider a couple in their early 30s who’ve qualified for one of two mortgage offers (they have a good FICO Score and are borrowing $300,000 for a $375,000 home):

1. An ARM loan with an initial fixed-rate period of five years: $300,000 at a 6.73 % rate with a down payment of $75,000 will have a monthly payment of $1,682 over those five years.
2. A 30-year fixed-rate loan: $300,000 at a 7.13 % rate APR with a down payment of $75,000 will have a monthly payment of $1,748 for the life of the loan.

The rate on the ARM loan is lower—at least for five years, in this case—so the monthly payment is lower. That difference, apart from being $66 less to pay each month, could be the difference between qualifying for a mortgage or not.

The lender’s underwriter, who is considering a borrower’s ability to keep up with mortgage payments, wants to see that no more than 43% of monthly income goes toward debt repayment—including the mortgage being applied for. The difference between the monthly mortgage payments of an ARM and a fixed-rate loan could also be the difference between passing muster with the lender’s underwriter or not. Lenders of federally guaranteed mortgages are required to verify borrowers’ incomes and ability to afford a monthly mortgage payment after making existing debt payments. Even a difference of $100 a month in mortgage payments could be the difference between qualifying for a federally backed mortgage or not—and that’s where ARMs come into their own.

Additionally, ARMs have been especially sought after by younger homebuyers, whose real incomes were expected to rise as they gained workplace experience. In other words, they could afford to take a risk of an interest rate increase. Monthly payments may rise down the road, but young homeowners could, historically, expect their incomes to rise. Meanwhile, the fixed-rate mortgage borrower (insurance and taxes remaining equal) may continue to write the same $1,748 check in 2054 as they would today—an enticing prospect, if they’ve found a forever home and believe that higher rates of inflation are here to stay.

So why aren’t more homeowners considering an adjustable rate mortgage, even though affordability is by far the primary concern among prospective homebuyers?

According to a number of recent surveys, some owners, especially minority homeowners, are reluctant to refinance, even when scenarios suggest they may lower monthly payments by $200 or more in some cases. Fear of being rejected, perhaps due to having less-than-stellar credit, may be informing part of the inaction. In addition, the sometimes arduous process of demonstrating that income is still sufficient to finance a new mortgage may be a discouragement—above and beyond the persistent news that mortgage rates, in general, remain elevated.

Economic concerns and broad dips in consumer confidence also may have shaken the conviction among millennials that incomes will rise steadily over time—perhaps another reason ARMs haven’t renewed in popularity.

The Bottom Line

Despite providing some advantages for new prospective homebuyers—lower initial monthly payments, as well as qualifying for a home that otherwise may be out of reach—ARMs remain a small sliver of the overall mortgage market. Even with today’s mortgage rates resembling those of the aughts, when more than 35% of home borrowers used ARMs to finance their home purchase, less than 10% of new mortgages are adjustable rate mortgages.