Riskier adjustable rate mortgages back in fashion as interest rates rise

As interest rates and housing prices rise, so does the interest in adjustable rate mortgages. Remember those? Well, ARMs are back. 

The use of adjustable rate mortgages has more than doubled in the past year going from 4 percent to 10 percent. These loans can make housing more affordable, in the short-term.

Home buyers over the last decade haven’t looked at ARMs too much because a 30-year fixed mortgage rate has been historically low. While rates are still low - 5 percent - they’re inching up.  And home prices keep surging, too, so home buyers are looking for ways to lower the cost.

For a quick review, a fixed rate is locked in usually for 30 years, but it can be 15 or 20. And it’s just that … fixed. If you lock in at 5 percent, that’s what it remains for the term of the loan. 

The benefit of an ARM is that your interest rate starts lower than a fixed rate — often a whole point lower — making your mortgage payment more affordable. But that rate fluctuates with market. You can lock it in, sometimes up to seven years, but it will jump up or down to meet the market after that. 

So you’re taking a risk. You can usually renegotiate the loan at the end of that short term, but if mortgage rates are higher, you will pay more than you had if you had just gone with a fixed rate. 

Selecting an ARM to finance your home isn't a bad idea if you don't plan on living in that house for too long. If in five years you plan to downsize or upsize, this could be a good fit for you. And it may be the only way young families get into homes which have skyrocketed 27 percent in price since the beginning of the pandemic.