Adjustable-Rate Mortgages Gain Traction as Borrowing Costs Rise

American homebuyers are increasingly opting for adjustable-rate mortgages (ARMs) as borrowing costs continue to climb, a trend that could lead to significant monthly payment increases for some. In the week ending September 18, nearly 11% of first-lien mortgage rate locks were for ARMs, marking the highest share in nearly four years and a notable increase from three months prior, according to the ICE Mortgage Monitor.

Among all homebuyers, approximately 9% chose an ARM, representing the second-highest weekly share recorded since 2022. This resurgence in ARM popularity coincides with a sharp rise in conventional mortgage rates. The ICE 30-year fixed-rate index surpassed 7% in September for the first time in 20 months, ending the month at 7.31%, its highest point since November 2023. Rates have been on an upward trajectory for seven consecutive months, climbing 136 basis points from their February low of 5.95%.

"ARMs are becoming more attractive to borrowers looking for relief from today’s higher fixed rates, but the overall market exposure to adjustable payments remains relatively limited," said Andy Walden, head of Mortgage and Housing Market Research at ICE, in the report.

Unlike fixed-rate mortgages, ARMs typically offer an initial period with a set interest rate, after which the rate adjusts based on market conditions. Currently, there are 3.1 million active first-lien ARMs nationwide, the most in approximately five and a half years, though they still constitute only 5.6% of all active mortgages.

While most of these ARMs have not yet begun to adjust, the risk of payment resets is expected to affect a growing number of homeowners starting next year. An estimated 186,000 homeowners are anticipated to experience their first ARM reset in 2027, an increase from the 148,000 expected this year.

The median borrower facing a reset in 2027 is projected to see their interest rate increase by about 2.2 percentage points, resulting in a monthly mortgage payment increase of approximately $645, or 24%. Borrowers who secured seven-year ARMs in 2020, during a period of historically low borrowing costs, may face the most substantial payment hikes. For the median borrower in this group, ICE estimates the mortgage rate could jump from 2.75% to 5.79% at the first reset, potentially increasing their monthly payment by over $1,000, or 36%.

These shifts toward ARMs are occurring as buyers seek strategies to mitigate the impact of higher interest rates. In August, more than half of purchase borrowers paid at least half a mortgage point upfront to secure a lower rate, and over a third paid at least one full point. However, these measures have done little to alleviate the broader housing affordability crisis. A buyer purchasing the median-priced U.S. home with a 20% down payment now faces a principal-and-interest payment of $2,383 per month, consuming 31.7% of the median household income—the most challenging affordability situation in nearly two years.

ICE estimates that to restore affordability to its 40-year average, mortgage rates would need to decrease by 2.6 percentage points, household incomes would need to rise by 32%, or home prices would need to fall by 24%, or a combination thereof. The increasing cost of borrowing is also beginning to affect demand, with purchase mortgage applications declining by 8% over a three-week period in September as rates moved above 7%.