Adjustable-Rate Mortgages Are on the Rise Once Again—Here’s What That Means for Today’s Homebuyers

Adjustable-rate mortgages (ARMs) played a significant role in the Great Recession of 2008, which is why a rising share of adjustable-rate mortgage applications in 2022 raised some eyebrows amid talks of a housing downturn. According to Zillow, however, today’s ARM borrowers are predominantly affluent households with larger down payments, meaning that these loans, alone, pose minimal risk of a housing market crash.

Monthly mortgage payments for ARMs are fixed for a predetermined period of time, and the quoted rate is typically lower than what would be available to the same borrower taking out a 30-year mortgage, but the interest rate could increase dramatically after the fixed period. While that scenario left some buyers in financial turmoil over a decade ago, strong demand and tighter lending practices ensure that adjustable-rate mortgages carry much less risk today than they did during the housing bubble and bust of 2008.

Lending practices have been reformed after hard lessons learned in 2008. Many subprime mortgages offered during that time acted similarly to ARMs in that the monthly payments were initially low, then increased in later years. That is where the similarities end, however. Today, mortgages carry much less risk than they did a couple of decades ago. Increased consumer protections from Dodd-Frank and increased regulations in the secondary mortgage market have led to tighter lending practices. More robust housing demand relative to available inventory has resulted in increased competition for each home, meaning buyers who win a competitive bid are likely to be more financially stable. This has all contributed to a more secure mortgage landscape. 

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