Nakul Mishra is already thinking about refinancing – even before he closes on his first home.
The 34-year-old had spent two years searching for the right home in Sacramento to settle into with his family. He finally found one he could afford, but not without some risk.
This month, Mishra opted to take out a seven-year adjustable-rate mortgage (ARM), betting he’ll score a lower rate before the fixed period expires. It’s a calculation more buyers are making lately as ARMs – the mortgage products that helped fuel housing market risk in the lead-up to the 2008 financial crisis – regain popularity.
An ARM loan offers Mishra something fixed-rate mortgages can’t: short-term breathing room from high borrowing costs. But they come with a risk. After a fixed introductory period, usually five, seven or 10 years, an ARM’s rate resets with the market. If rates rise, monthly payments can surge.
Still, the number of Americans turning to these riskier loans has climbed sharply. The share of homebuyers using ARM loans has more than tripled over the past five years, according to the Mortgage Bankers Association. In one week this September, ARMs accounted for their largest share — 12.9% — of total mortgage applications since 2008.
The uptick in ARMs comes as America’s housing affordability crisis remains far from resolved. National home prices continue to climb, and mortgage rates have hovered between 6% and 7% for years. While the Trump administration has pledged to tackle affordability — including a proposal for a 50-year mortgage — limited options for reducing monthly payments are pushing more homebuyers toward loans that offer immediate relief, even if they introduce more uncertainty down the road.
After his seven-year introductory period ends, Mishra’s loan can increase by a maximum of two percentage points the first time it adjusts. Eventually, though, it can climb up to five percentage points higher, meaning his mortgage rate could reach 10.5%.
“The interest rate after the seven-year period can be scary,” he said. “We don’t want to get into that territory.”
Some experts say today’s ARMs include safeguards that make a 2008-style meltdown less likely. Even so, they warn that buyers should tread carefully with these variable-rate loans.
Here’s what you need to know.
What’s behind the rise?
The renewed interest in ARMs is partly driven by buyers betting that mortgage rates will fall from current levels, said Andrew Marquis, a senior vice president at CrossCountry Mortgage, a lender in Lexington, Massachusetts.
After raising interest rates at the fastest pace in more than 40 years to fight surging inflation in 2022 and 2023, the Federal Reserve has now reversed course, cutting its benchmark rate three times last year and twice so far this year. Many economists expect the Fed to cut rates further in the coming year.
The Fed doesn’t set mortgage rates, but its moves can influence them by pushing the 10-year US Treasury yield up or down.
Right now, there’s a mix of people considering ARM loans, Marquis said.
“It could be that they are only going to be in their house for five to seven years and might move,” he said. “There are also people who think rates are going to go lower and they’ll refinance.”
Mishra falls into the second camp. He chose a 7/6 ARM at 5.5%, meaning the introductory period lasts for seven years, after which the rate resets every six months. That introductory rate is well below the average 30-year fixed rate, which was 6.24% last week, according to Freddie Mac.
Mishra said he shopped around to at least five or six lenders to get the most competitive mortgage rate.
Mishra said he thinks the next two to three years will likely bring lower mortgage rates.
“The worst-case scenario is that rates don’t go lower and we have to get through the seven years,” he said. “But at that point, we will still be saving $200 to $300 a month. That will add up.”
Are there new protections?
While ARM loans can lead to short-term savings, there is a risk that your rate will reset when interest rates are higher.
Such was the case in 2008, when loans played a key role in the subprime mortgage crisis. Looser underwriting standards meant ARMs were offered to borrowers with poor credit who often couldn’t afford their monthly mortgage payments after the fixed-rate period expired.
The total number of ARM loans is up significantly from a record low in 2022. However, it’s still a fraction of what it was during the housing bubble in the mid-2000s, according to data from Intercontinental Exchange (ICE), a financial services company.
In September of this year, there were about 3 million total adjustable-rate home loans, representing 5.4% all US loans, according to ICE. Compare that to September 2008, when ARMs made up 26% of all loans.
Today, documentation standards are much stricter, said Martin Seay, a professor of personal financial planning at Kansas State University.
Lenders are now required to assess whether a borrower can afford the loan at a higher, adjusted rate, not just the lower introductory rate. New rules also cap how much the interest rate can rise or fall during adjustment periods.
And ARMs today carry longer initial fixed periods than their predecessors. In the late 1990s and early 2000s, payments were often fixed for an initial period of just one to three years, according to the Urban Institute.
Among the nearly 2 million ARM loans that have been originated since 2020 and are still active, 80% have initial fixed periods of at least five years, and two-thirds are fixed for at least seven years, according to ICE.
But taking out an ARM loan over a fixed-rate loan has some risk, Seay said.
“People have to understand the cleanest way to use an adjustable-rate mortgage is if you know you’re not going to stay somewhere for more than five to seven years, whatever that initial term is,” he said. “Past that, you’re making a bet.”
“An economist can’t tell you what is going to happen with interest rates in seven years, so I can’t imagine the average person is going to be able to accurately predict it,” he added.