Why Adjustable-Rate Mortgages Are Making a Comeback—and What You Should Know Before Getting One

Buying a home is never easy, and right now, it can feel downright impossible. High home prices and rising mortgage rates have pushed monthly payments higher than many expected. But lately, more homebuyers are giving adjustable-rate mortgages (ARMs) another look—drawn in by their lower starting rates and the chance to finally step onto the property ladder. Are ARMs the key to unlocking affordability in today’s market, or is there a catch lurking down the road? Let’s break down what’s happening, how ARMs work, and how you can decide if one is right for you.

The ARM Comeback: Why More Buyers Are Considering Adjustable-Rate Mortgages

Adjustable-rate mortgages are suddenly popular again after years in the shadows. This year, ARMs climbed to 7.8% of all mortgage applications—the highest share in 17 months. What’s behind this shift? It all comes down to affordability. Right now, ARMs typically offer starting interest rates about 0.5% lower than the traditional 30-year fixed loan. That can make a noticeable difference on your monthly payment, especially as the average 30-year fixed mortgage rate recently jumped to around 6.83%, according to the latest data.

Let’s put that in perspective: On a $400,000 mortgage, a half-percent lower rate could save you close to $120 a month at first. It’s easy to see why buyers—especially first-timers—are tempted to grab those savings.

“When rates go up, people naturally look for ways to lower their cost,” says Nicole Rueth, a Denver-based mortgage lender. “ARMs can provide a window of savings if you plan wisely.”

Lenders have responded by offering more ARM options—one study found a 230% increase in available ARM products since 2021. Homebuyers are taking notice, with around 40% saying they’d consider an adjustable-rate mortgage if it helped them qualify.

This doesn’t mean ARMs are for everyone. These loans come with built-in risks, and your payment could rise in a few years if interest rates stay high or keep going up.

• Tip: Compare the starting interest rate of an ARM against a fixed-rate mortgage—and use an online calculator to see what your payment could be after the initial fixed period ends.

Next, let’s look closer at how ARMs actually work, and what you need to watch for before signing on the dotted line.

How Adjustable-Rate Mortgages Work: Pros, Cons, and Key Terms

Think of an adjustable-rate mortgage like a plane ticket with a cheaper price for the first leg of your trip—but a big question mark for the rest. With most ARMs, you start with a fixed rate for a set period (often 5, 7, or 10 years). After that, your rate can change—usually once per year—based on what’s happening in the wider economy.

For example, a “5/1 ARM” means you get a fixed rate for 5 years, then the rate can change every year after that. Your payment could go up (sometimes by a lot), especially if interest rates are still high when your fixed period ends.

“You need to plan for the possibility that your payment could increase, and make sure you’d be able to afford it,” advises Jacob Channel, a senior economist at LendingTree.

The main advantage of an ARM is the lower initial monthly payment—but the trade-off is risk and uncertainty later on. Here’s a quick rundown:

• Pros: Lower starting interest rate, more affordable monthly payment at first, could save thousands if you sell, refinance, or pay off the loan before the adjustable period kicks in.
• Cons: Uncertainty about future payments, payment could rise sharply, and budgeting is more complicated if you plan to stay put for many years.

Terms to know:

• Initial fixed period: How long your first, lower rate lasts (ex: 5 years).
• Adjustment period: How often your rate can change afterward (ex: every year).
• Rate cap: The maximum your rate can rise each year and over the life of the loan.

Suppose you choose a 5/1 ARM with a 5% start rate, 2% annual cap, and 5% lifetime cap. After five years, if rates have gone up, your rate could jump 2% the first year, and keep rising each year up to five percentage points above your original rate. That’s a payment shock you need to be ready for.

Next steps: Always ask your lender for the worst-case payment scenario after the fixed period ends, and build a cushion into your budget.

Is an ARM Right for You? Questions to Ask—and How to Protect Yourself

ARMs aren’t a one-size-fits-all solution. The people most likely to benefit are those who don’t plan to stay in their home long, or who are sure they’ll be able to refinance later. For example, if you’re buying a starter condo with plans to move in a few years, the initial savings could make sense. On the other hand, if you expect to stay put for a decade or more—or if locking in a steady payment helps you sleep at night—a fixed-rate loan may be the better bet.

“ARM borrowers need to look beyond the first year’s savings and think hard about their future plans and financial cushion,” says Karan Kaul, a researcher with the Urban Institute.

Here are key questions to consider before choosing an ARM:

• How long do you realistically plan to keep the home or the mortgage?
• Could you afford the payment if rates rise to the cap limit?
• Is your job/income stable enough to handle possible increases?
• What’s your back-up plan if rates remain high later?

It’s smart to budget as if your payment might jump after the initial period—even if you hope it won’t. Consider stashing the difference between your ARM and a fixed-rate payment into savings, so you’re ready if your cost rises.

• Tip: Review the loan’s “caps” and “margins” carefully. Ask your lender about any prepayment penalties, and make sure you know the earliest you can refinance or pay off your loan without extra fees.

Finally, while banks and lenders are offering more ARMs now, remember how quickly markets and personal situations can change. Stay flexible, compare multiple offers, and make your decision based on your real-life budget—not just advertised rates.

Whether you pick an ARM or a fixed mortgage, the goal is the same: get a loan you can comfortably afford now, and years down the line. With the right questions and a little planning, you can make a choice that fits your life today—and tomorrow.