Adjustable-Rate Mortgages Make a Comeback Amid High Rates—What Buyers Need to Know Now

With the average 30-year fixed mortgage rate climbing to over 7% this spring, more homebuyers are searching for ways to keep their monthly payments lower—at least to start. That’s where adjustable-rate mortgages (ARMs) are rolling back into the spotlight. Once seen as risky, ARMs are suddenly more appealing to buyers squeezed by high prices and rising rates. Here’s what you need to know if you’re considering this type of loan, including how they work, where the risks are, and whether they’re a smart fit for your budget.

Why ARMs Are Popular Again: Lower Payments Up Front, Higher Uncertainty Later

ARMs are getting more attention because they can offer lower payments right now, when fixed-rate loans feel out of reach. According to the Mortgage Bankers Association, applications for ARMs jumped to 7.8% of total mortgage demand—the highest of the year. The reason? The average fixed 30-year rate recently hit 7.29%, making the lower initial rates on ARMs tempting for many shoppers.

Think of an ARM like a sale with a catch: you get a discount now, but the price could go up later. Most ARMs lock in a low rate for the first 3, 5, 7, or even 10 years (the ‘introductory period’). After that, the rate resets—often yearly—and can go up or down based on what the market does. This means your payment could climb quickly if interest rates rise.

“An ARM can be smart if you’re planning to move or refinance before the rate resets, but it can get tricky if you end up staying longer,” says John Ulzheimer, a consumer credit expert.

While initially, your monthly payment will likely be lower with an ARM than a fixed-rate loan, future increases can make budgeting unpredictable. According to a Point.com survey, 70% of homeowners with ARMs in the last decade said they regretted it, usually because the payments jumped higher than expected after the initial period.

If your goal is to save money in the first few years—and you’re pretty sure you won’t be in the house long term—an ARM might be worth exploring. But if you dislike uncertainty about future payments, a fixed-rate loan offers peace of mind, even if it costs more now.

Next steps: Ask your lender to calculate your payment not just for the first period, but for the worst-case scenario if rates adjust upward later. Shop around and compare both ARM and fixed-rate offers using online calculators to see the real-life difference in your monthly bills. Finally, have a backup plan if you can’t move or refinance before the higher rate kicks in.

Who’s Using ARMs—and Why Risk Isn’t the Same for Everyone

ARMs aren’t equally popular everywhere. They’re especially common in places where home prices are sky-high, like San Francisco or New York, or for buyers taking out big loans. In May 2024, for example, ARMs made up 40% of mortgage originations over $1 million—because the savings from a lower initial rate are much larger on a big loan.

But ARMs aren’t just for the wealthy. Some first-time buyers are choosing them simply to get a foot in the door when prices and fixed rates are out of reach. The logic: get in now, pay less upfront, then hope to refinance or move before the adjustable period sends payments higher.

“In expensive markets, ARMs can help buyers stretch their budgets—but only if they fully understand the risks and future payment possibilities,” says Selma Hepp, chief economist at CoreLogic.

One important money tip: Your lender is required to show you examples of how much your payment might go up when the adjustable period starts, but it’s up to you to dig into the details. Look for the maximum rate cap—the highest possible rate your loan can hit—and make sure you could swing that payment if needed. If the answer is no, it’s probably too risky.

Steps for considering an ARM safely:

• Ask yourself how long you expect to keep the house. If it’s less than the fixed-rate period, an ARM might pay off.
• Build an emergency fund that could cover a bigger payment down the line.
• Read the fine print: caps, indexes, and adjustment schedules all matter—a lot!
• Talk to at least two lenders, since ARM terms and rates can vary just as much as fixed mortgages.

Remember, while ARMs have gotten safer since the 2007-2009 crisis—thanks to new consumer protection rules—they aren’t one-size-fits-all. For many buyers, especially those who plan to stay put for years, the comfort of a steady, predictable payment is worth the higher cost.

Weighing the Pros and Cons: Is an ARM Right for You?

Here’s a quick pro/con breakdown to help you decide if an ARM is a fit:

• Pro: Lower monthly payments for the first few years, which can free up money for savings, renovations, or other needs.
• Pro: Great option for buyers who plan to move or refinance before the adjustable period begins.
• Con: Payments can rise significantly after the initial period, making it harder to budget or save.
• Con: Market swings are unpredictable. If rates climb sharply, you could face much higher costs.
• Con: Regret is common: 70% of recent ARM borrowers wished they’d chosen differently due to payment surprises.

“Think of an ARM like wearing shoes that fit great now, but might pinch later—you need to be ready if it happens,” advises a housing counselor from CNET’s recent coverage.

Even though ARMs currently offer relief from high fixed rates, they aren’t a magic fix. They’re best for buyers with flexible plans and stable finances. If you’re stretching just to make the initial payment, an ARM could leave you financially vulnerable later.

If you’re leaning toward an ARM:

• Use the lowest and highest payment scenarios when budgeting.
• Consider what could make it hard to move or refinance (job changes, home value dips, credit score changes).
• Factor in other costs of homeownership—taxes, insurance, repairs—so you aren’t caught off guard.
• Always get a second opinion from a lender or trusted housing counselor.

Next steps: ARMs can be useful money tools when used wisely. Before you lock in, review your personal plans and what “worst-case” really looks like. If you’re unsure, stick with what lets you sleep at night—even if it costs a bit more.