With home prices soaring in 2021 and interest rates climbing in 2022, many prospective homebuyers are considering alternatives to the traditional fixed-rate mortgage. Although adjustable-rate mortgages are a popular option with real upsides, borrowers should also be aware of potentially significant risks.
What Is An Adjustable-Rate Mortgage?
Adjustable-rate mortgages are often abbreviated as ARMs, and are sometimes also called “variable-rate mortgages” or “floating-rate mortgages.” ARMs offer interest rates that are initially low compared to traditional fixed-rate mortgages. After the introductory period, the ARM’s interest rate varies. (To compare ARMs to other types of mortgages, see our colleague Eric Meermann’s article “Buying Your First Home: Down Payments And Mortgages.”)
Benefits And Pitfalls Of ARMs
Housing affordability has hit a marked low in the last three decades, especially with interest rates on the rise. As of this writing, the national average rate on a 30-year fixed mortgage is 7.32%, and the Federal Reserve is expected to raise rates again before the end of 2022. Making matters worse, housing inventory is low, further driving up prices. Under these circumstances, opting for an ARM as opposed to a fixed-rate mortgage holds an obvious appeal, given the initial rates well below those available on fixed-rate mortgages. According to the Mortgage Bankers Association, as reported by The Wall Street Journal, as of August 2022 more than 9% of all mortgage applications were for ARMs, compared to 3.3% in August 2021.
