Published May 28, 2025
Thinking about an Adjustable-Rate Mortgage? Read This First.
If you have been searching for a house recently, you may have experienced the impact of current mortgage rates. Due to these rates and increasing home prices, many buyers are beginning to look into alternative loan types to make their budgets fit. One option that is becoming more popular is adjustable-rate mortgages (ARMs).
If the 2008 crash comes to mind, you might have some worries. However, there’s no need for concern. Today’s ARMs are different, and here’s why.
In the past, many buyers received loans that became unaffordable once interest rates adjusted. Today, however, lenders exercise greater caution and assess your ability to manage the loan if rates rise. Therefore, it’s a misconception to think that the resurgence of ARMs indicates an impending crash. Currently, it simply reflects how some buyers are seeking innovative solutions in times of financial strain.
You can see the recent trend in this data from the Mortgage Bankers Association (MBA). Currently, more people are choosing ARMs (see graph below):
While ARMs may not be suitable for everyone, they can offer benefits in certain situations.
How an Adjustable-Rate Mortgage Works
Here’s how Business Insider explains the main difference between a fixed-rate mortgage and an adjustable-rate mortgage:
“With a fixed-rate mortgage, your interest rate remains the same for the entire time you have the loan. This keeps your monthly payment the same for years . . . adjustable-rate mortgages work differently. You'll start off with the same rate for a few years, but after that, your rate can change periodically. This means that if average rates have gone up, your mortgage payment will increase. If they've gone down, your payment will decrease.”
Of course, things like taxes or homeowner’s insurance can still have an impact on a fixed-rate loan, but the baseline of your mortgage payment doesn’t change much. Adjustable-rate mortgages don't work the same way.
Pros and Cons of an ARM
Here’s a little more information on why some buyers are giving ARMs another look. They offer some pretty appealing upsides, like a lower initial rate. As Business Insider explains:
"Because ARM rates are typically lower than fixed mortgage rates, they can help buyers find affordability when rates are high. With a lower ARM rate, you can get a smaller monthly payment or afford more house than you could with a fixed-rate loan."
On the flip side, just remember, if you have an ARM, your rate will change over time. As Barron’s explains there’s the potential for higher costs later:
"Adjustable-rate loans offer a lower initial rate, but recalculate after a period. That is a plus for borrowers if rates come down in the future, or if a borrower sells before the fixed period ends, but can lead to higher costs if they hold on to their home and rates go up."
So, while the upfront savings can be helpful now, you'll want to think through what could happen if you're still in that home when your initial rate ends. Because while projections show rates are expected to ease a bit over the next year or two, no forecast is guaranteed.
That’s why it’s essential to talk with your lender and financial advisor about all your options and whether an ARM aligns with your financial goals and your comfort with risk.
Bottom Line
For the right buyer, ARMs can offer some big advantages. But they’re not one-size-fits-all. The key is understanding how they work, weighing the pros and cons, and thinking through if they’d be something that would work for you financially. And that’s why you need to talk to a trusted lender and financial advisor before you make any decisions.
