Homebuyers

Adjustable-Rate Mortgages Are Back: Here’s What You Need to Know

Most people who buy a home need a mortgage to do so. There are many to choose from, including loans from the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA), to name a few.

Yet as mortgage rates remain elevated in 2025, homebuyers are increasingly turning to adjustable-rate mortgages (ARMs) as a potential solution to manage higher borrowing costs.

The percentage of borrowers applying for ARMs has risen to its highest level since November 2023, according to an April report by the Mortgage Bankers Association. That’s driven by the appeal of lower initial mortgage interest rates compared to the more common fixed-rate loans.

ARMs typically begin with a lower interest rate for a specified period, generally five to 10 years. That can save you money on your monthly mortgage payments. However, when that introductory period ends, your monthly mortgage payments—can sometimes rise substantially. 

Most buyers who use ARMs either don’t plan to be in the homes after the rate adjusts or plan to refinance into a fixed-rate loan once the introductory period ends.

For some borrowers, ARMs can be a wise choice. But before you jump into this loan, it’s crucial to understand how it works, when it's a good idea, and what to watch out for when those rates adjust. So, if you’re considering an ARM, here’s what you need to know to make the right call. 

What is an adjustable-rate mortgage?

An adjustable-rate mortgage is a home loan with an interest rate that adjusts over time. Instead of locking in a fixed rate for the life of the loan, ARMs typically start with a lower interest rate for a set period—usually five, seven, or 10 years—and then adjust periodically based on market conditions. 

Take a 5/1 ARM, for example. You get a fixed interest rate for the first five years. After that, the rate adjusts annually. 

Once the adjustment period kicks in, your mortgage payments aren’t locked in anymore. Instead, they’ll rise or fall every year based on market rates. If interest rates go up, so will your payments. 

However, most ARMs have limits on how much the rate can go up during a single period or over the life of the loan. But even with those limits, payment shock can still be a concern for many buyers.

Why would a homebuyer choose an adjustable-rate mortgage?

Homebuyers may decide to get an ARM for one big reason: the savings. An ARM’s interest rate is usually lower than a similar fixed-rate loan. This can mean you pay less money at the start of your loan.  

“Buyers are looking for ways to lower monthly payments, and ARMs offer that,” said Ron Myers of Ron Buys Florida Homes. 

If you plan to sell or refinance before the adjustable period kicks in, you could pocket a tidy sum in the meantime.

“I’ve seen investors and buyers use ARMs to get in now and refinance later,” added Meyers.

There is also the chance that interest rates might drop during the adjustable period, which would lower your monthly payments. But, of course, that’s not a given.

“Buyers are betting that in the future the rates will be lower,” said Anthony Ray Ramirez, a San Diego, Calif.-based loan consultant at New American Funding. “Or during the temporary fixed-rate period, say five years, they plan on their income being higher to afford the home—which may or may not happen.”

The risks of adjustable-rate mortgages

Adjustable-rate mortgages gained infamy during the financial crisis in the 2000s. Low introductory mortgage rates lured in many borrowers, who then faced payments that some couldn’t afford once those rates adjusted. 

This led to many homeowners defaulting on their mortgages and losing their homes. 

Today, the loans are less risky with safeguards put in place to protect buyers.

Still, Ramirez adds this warning about ARMs: “It’s not for everyone and should be considered with caution.”

When does buying a home with an adjustable-rate mortgage make sense?

ARMs can be a strategic move in certain situations.

If you’re buying a new home and plan to move in a few years, you could get a lower interest rate at first and sell before the change happens.

Or if you expect to make or come into more money in the future, you might be better able to handle possible rate increases later.

ARMs can also play into a refinancing strategy. If you plan to refinance before the end of the fixed-rate period, you can lock in savings upfront without worrying about long-term rate hikes.

However, there are no guarantees that rates will fall.

What to watch out for with adjustable-rate mortgages

Before signing on the dotted line for an ARM, dig into the loan’s terms. How high can the rate go? What are the caps on each adjustment? 

 “In a rising interest rate environment, it can be difficult if you are on the wrong side of the bet,” said Ramirez.

And don’t forget to check for prepayment penalties. Some ARMs charge hefty fees for paying off the loan early.

Finally, run some worst-case scenarios. If interest rates skyrocket, could you handle the new payment? If the potential payment shock is too much, it might be worth considering a safer, fixed-rate option.

Adjustable-rate mortgages can be a useful tool for buyers who weigh the potential for initial savings against the risk of higher payments down the road. And always, always read the fine print.

Anthony Ray Ramirez NMLS # 249819