As home prices and mortgage rates surge to new highs, some buyers are turning to adjustable-rate mortgages (ARMs) as a cost-friendly but risky home financing option. Adjustable-rate mortgages are considerably cheaper than fixed-rate mortgages for the first three to seven years of homeownership, but their flexibility can also cost homeowners down the road, according to Realtor.com.
Adjustable-rate mortgages reset after a previously agreed upon period of time to accurately reflect current market conditions, but in a time of record-breaking price hikes, that could mean a significant jump in housing payments. While ARMs made up just 1% of total mortgage purchase applications for the month of February, the share of buyers taking out adjustable-rate mortgages was up by 70% year-over-year.
“When ARMs first came out, one of the huge advantages of getting one was that your rate could go down,” says Rocke Andrews, a mortgage broker with Lending Arizona in Tucson.
But mortgage rates are largely forecast to keep rising, so that will likely be seen in their monthly payments down the line.
The good news is that even though most of these buyers will see rates on their ARMs increase, the uptick in these loans isn’t expected to trigger another foreclosure crisis.