Is an Adjustable-Rate Mortgage Right for You?

With fixed rates rising, ARMs offer lower monthly payments for the initial term. But know the risks.

- LAURA PETRECCA

WHEN MORTGAGE RATES were at record lows not so long ago, adjustable-rate mortgages (ARMs) were sidelined in favor of the more stable 15- and 30-year fixed-rate mortgage. But as rates rise, ARMs—which typically have lower initial rates than their fixed-rate cousins—have gained popularity.

“The rate on the fixed-rate mortgage has gone up much faster than the rate on the adjustable-rate mortgage,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association. Over the past year through early December, the 30-year fixed-rate loan has more than doubled, from 3.11% to 6.49%, according to Freddie Mac. Meanwhile, the average initial rate of a popular 5/1 ARM was 5.48%.

The share of home buyers applying for an ARM has almost quadrupled since the start of 2022, coming close to 11% of all applications for the week ending November 11, according to the MBA. In October, ARMs accounted for nearly 13% of mortgage applications, the highest share since March 2008.

How ARMs work. As the name implies, most ARMs adjust after the initial lower-rate period ends. Once the adjustment period kicks in, the interest rate changes occur at regular intervals, such as annually or every six months, until the end of the loan term. The new rate is based on a pre-determined index and margin and, depending on market conditions, can make your monthly payment higher or lower than what you paid previously.