Adjustable-rate mortgages (ARMs) often start with lower interest rates than 30-year fixed mortgages, reducing initial monthly payments.
Borrowers who expect to move, refinance, or pay off their loan within a few years may benefit from an ARM's lower introductory rate.
Rising mortgage rates and economic uncertainty can make ARMs riskier, since monthly payments can increase significantly after the initial fixed period ends.
As mortgage rates move higher once again, some homebuyers are taking a second look at adjustable-rate mortgages (ARMs) as a way to reduce borrowing costs.
The average rate on a 30-year fixed-rate mortgage has climbed in recent weeks, pushing monthly payments higher and challenging affordability for many buyers. In response, lenders report renewed interest in ARMs, which typically offer lower introductory rates than traditional fixed-rate loans.
But while ARMs can save borrowers money in the short term, they also carry risks that become more pronounced when interest rates are rising.
How ARMs work
Unlike a 30-year fixed-rate mortgage, which locks in the same interest rate for the life of the loan, an ARM starts with a fixed rate for a set period—often five, seven, or 10 years. After that introductory period ends, the interest rate adjusts periodically based on a benchmark rate and the lender's margin.
Because borrowers assume the risk of future rate changes, lenders generally offer lower initial rates on ARMs than on comparable fixed-rate mortgages.
For example, a borrower choosing a 7/1 ARM may receive a lower rate than a 30-year fixed mortgage, reducing monthly payments during the first seven years of the loan.
The advantages
The biggest advantage of an ARM is affordability. A lower introductory rate can reduce monthly payments and help borrowers qualify for a larger loan. The savings can be significant, particularly when fixed mortgage rates are elevated.
Financial planners often point out that ARMs can make sense for buyers who do not expect to stay in the home long term. Someone who plans to relocate for work, upgrade to a larger home, or refinance before the adjustment period begins may never experience a rate reset.
Some borrowers also choose ARMs when they believe interest rates are likely to decline in the future, allowing them to refinance into a lower-rate fixed mortgage later.
The risks
The primary drawback is uncertainty. Once the fixed-rate period expires, the interest rate can increase, potentially leading to substantially higher monthly payments. While most ARMs have caps limiting how much rates can rise at each adjustment and over the life of the loan, payment shocks can still be significant.
That risk is particularly relevant in today's environment. If inflation remains stubborn or economic conditions keep interest rates elevated, borrowers could face higher housing costs when their loans adjust.
An ARM can also complicate financial planning because future payments are difficult to predict. Fixed-rate mortgages, by contrast, provide stability and protection against rising interest rates.
For risk-averse borrowers or those planning to stay in a home for many years, a fixed-rate mortgage may offer greater peace of mind despite its higher initial cost.
Which loan makes more sense?
The answer largely depends on a borrower's timeline and tolerance for risk.
A 30-year fixed mortgage remains the safer choice for homeowners seeking predictable payments and long-term stability. It eliminates concerns about future rate increases and simplifies household budgeting.
An ARM may be attractive for borrowers who are confident they will sell, refinance, or pay off the loan before the adjustment period begins. However, anyone considering an ARM should carefully evaluate how high their payments could rise under different interest-rate scenarios.
With mortgage rates climbing again, the lower upfront cost of an ARM may be tempting. But borrowers should weigh the potential savings against the possibility of higher payments down the road before deciding which loan best fits their financial goals.