Soaring mortgage costs are pushing more Americans toward riskier loans.
As home prices and borrowing costs climb to painful new highs, more Americans are turning to adjustable-rate mortgages — the same type of loan that helped fuel the 2008 housing crash.
Known as ARMs, these mortgages lure buyers in with lower initial rates before adjusting over time based on the broader market.
That means smaller payments upfront — but potentially far larger ones later if interest rates rise or are expected to.
Once the fixed period ends, lenders reset the rate based on current market conditions, which can send monthly bills surging by hundreds of dollars overnight.
In the week ended October 3, about 10 percent of mortgage applications were for ARMs, according to the Mortgage Bankers Association. This was the highest rate since 2023, The Wall Street Journal reported.
Homebuyers are turning to ARMs as property prices and mortgage fees surge, making the housing market unaffordable for many.
Property tax and home insurance costs are also increasing across much of the US, piling even more pressure on prospective homebuyers.
ARMs were popular before the housing market crash in 2008 (Pictured: An abandoned home in Detroit, Michigan)
The average rate for a 30-year fixed mortgage in the five days ending October 29 was 6.15 percent, compared with 5.46 percent for five-year and seven-year ARMs, according to mortgage-technology company Optimal Blue.
‘We see more borrowers trying to get rates in the 5 percent range,’ Scott Bridges, a Pennymac executive who oversees consumer lending, told the Journal.
‘Typically with an ARM loan, that’s one of the only ways you’re going to get there.’
Buyers who take on these loans are betting that mortgage rates will fall in the coming years and they will be able to refinance.
However there is the risk that their financial situation may change and they will not qualify for a new loan if and when rates drop.
This year, ARMs have lower upfront rates than fixed loans, making them a more appealing choice for Americans.
‘In general in the borrower community, there’s more of a sense of calm about rates are more likely to go lower from here than they are to go higher,’ Jeff DerGurahian, chief investment officer and head economist at LoanDepot, told the outlet.
Mortgage rates tend to move with government borrowing costs, and the Federal Reserve cut interest rates last week for the second time this year.
This year, ARMs have lower upfront rates than fixed loans, making them a more appealing choice for Americans
Americans are increasingly turning towards ARMs as housing costs soar
ARMs were popular in the years leading up to the financial crash, when around a third of all mortgage applications had adjustable rates.
Many people found, however, that they could not afford their mortgage after the rate adjusted after a couple of years.
Then when the housing market crashed in 2008, millions of people ended up in foreclosure.
But this is less likely to happen today due to tighter lending standards for most ARMs on how much the interest rate can adjust.
The rising popularity of ARMs comes as the housing market in many areas across the US remains stuck.
Around 15 percent of homebuying agreements were canceled in September, up from roughly 13.6 percent a year earlier, according to a report from Redfin.
To put that number into perspective, just over 53,000 home–purchase agreements nationwide were canceled.
