Homeowners Brace for Mortgage Payment Hikes as ARMs Reset

Hundreds of thousands of U.S. homeowners are facing potentially substantial increases in their monthly mortgage payments as their adjustable-rate mortgages (ARMs) approach their first interest rate adjustments. Approximately 150,000 borrowers are scheduled to see their rates reset later this year, according to data from ICE Mortgage Technology.

ARMs typically offer a lower initial interest rate for a fixed period, after which the rate is recalculated periodically. This structure can lead to significant payment shocks when the introductory rate expires. Some borrowers could see their monthly payments increase by more than $1,000.

ICE Mortgage Technology reports that an additional 186,000 borrowers are scheduled for ARM rate resets in 2027, and another 155,000 in 2028. In total, nearly half a million American homeowners are expected to face a financial reckoning on their ARMs over the next three years.

Despite these potential increases, ARMs are seeing renewed interest from buyers seeking more affordable homeownership options. Applications for ARMs accounted for 10.3 percent of mortgage applications in late September, up from seven percent at the beginning of the year. This trend is occurring as fixed mortgage rates hover around seven percent.

Currently, around 3.1 million ARMs are outstanding in the U.S., representing about 5.6 percent of the roughly 55 million active mortgages. Most of these are still within their initial fixed-rate periods, meaning the impact of resetting rates is concentrated among a smaller group of homeowners.

For those whose introductory periods are ending, the financial consequences can be significant. For example, seven-year ARMs originated in 2019 with a median initial interest rate of three percent and a median outstanding balance of $548,000 are now expected to see their median adjusted rate more than double to over six percent. This could result in a median monthly payment increase of $1,080.

However, not all ARM resets lead to higher payments. Some borrowers may actually see their payments decrease. For instance, homeowners with three-year ARMs originated in 2023, which had a median initial rate of 8.4 percent, could see their rates fall to 7.7 percent. This decrease could trim monthly payments by approximately $124, leading to about $4,464 in savings over three years and potentially allowing borrowers to pay down more principal.

The prospect of resetting rates has fueled discussions about whether homeowners should refinance into fixed-rate mortgages. Some question why borrowers did not refinance during periods of historically low interest rates. Others point to the uncertainty of future rates and the complexities homeowners faced during the pandemic.

Refinancing into a fixed-rate mortgage can provide financial certainty, although it may not offer immediate savings and involves closing costs, which can range from two to five percent of the loan amount. Lenders are generally required to notify borrowers seven to eight months before their first adjusted payment, providing time to evaluate their options.

The situation serves as a reminder for potential ARM borrowers to carefully consider their household budget and assess their ability to manage higher payments when the initial, lower-rate period concludes.