Quick Summary

This blog explains the rising popularity of adjustable-rate mortgages (ARMs) in 2024 amid high home prices, rising mortgage rates, and declining affordability. It explores why buyers are turning to ARMs, how they work, and the short-term benefits versus long-term risks. Readers learn who should and shouldn’t consider ARMs, strategic ways to use them, and how the broader economic context—like inflation, Federal Reserve policy, and the housing market—affects ARM decisions. The blog empowers potential buyers to navigate the housing affordability crisis with informed strategies and risk management.

When the Dream of Homeownership Gets Pricier by the Month

For millions of Americans, the dream of owning a home has never felt farther out of reach. Mortgage rates have climbed to their highest levels since 2023, home prices remain stubbornly high, and affordability is scraping the bottom of the barrel.

In this pressure cooker of a market, more buyers are now turning to a familiar — and controversial — tool: the adjustable-rate mortgage, better known as an ARM.

According to the Mortgage Bankers Association (MBA), ARM applications now make up 7.8% of all mortgage applications — the highest level this year. And that number’s still climbing.

With average 5-year ARM rates falling to 6.60%, these flexible loans are offering just enough short-term breathing room to keep homeownership dreams alive — at least for now.

Why Buyers Are Embracing ARMs Again

A decade ago, ARMs had a bad reputation. They were seen as risky, even reckless — a symbol of the 2008 housing crisis.

But 2024 has rewritten the script.

Mike Fratantoni, chief economist at the MBA, explains the logic behind the resurgence:

“Prospective homebuyers are looking for ways to improve affordability, and switching to an ARM is one means of doing that, with ARM rates in the mid-6 percent range for loans with an initial fixed period of five years.”

In plain English: buyers are desperate for relief. And ARMs — with their lower introductory rates — are one of the few tools left on the table.

When the average 30-year fixed mortgage sits at 7.29%, a 6.6% ARM can mean the difference between qualifying for a home or walking away empty-handed.

Understanding How Adjustable-Rate Mortgages Work

An adjustable-rate mortgage is exactly what it sounds like — a loan with an interest rate that can change over time.

Here’s how it works in practice:

Fixed introductory period – Most ARMs start with a fixed rate for 5, 7, or 10 years.
Adjustment phase – After the fixed period ends, the rate “resets” periodically based on market benchmarks (like the SOFR index).

Rate caps – Lenders often include caps to limit how much your rate can increase per year and over the life of the loan.

This means borrowers can enjoy lower payments early on — sometimes saving hundreds of dollars a month — but they must be prepared for potential increases later.

For example, a buyer who takes out a 5/6 ARM today might lock in a 6.6% rate for five years. If rates drop during that time, they could refinance into a fixed mortgage. But if rates rise, their payments could jump dramatically once the fixed period ends.

It’s a classic trade-off: short-term gain vs. long-term uncertainty.

Why ARMs Are Back in the Spotlight

So, why are adjustable-rate mortgages suddenly making a comeback after years in the shadows?

The answer lies in a toxic cocktail of high interest rates, persistent inflation, and stagnant wages.

Even though home prices have cooled slightly since their 2022 peaks, the cost of borrowing has skyrocketed. The Federal Reserve’s battle with inflation has pushed the 30-year fixed rate back up to 7.29% — its highest level since November 2023.

That’s created a painful reality check for buyers:

The average monthly payment on a $400,000 home has jumped nearly 40% compared to two years ago.

Median household income hasn’t kept pace.
And inventory remains painfully low, keeping prices elevated.

In this environment, the 0.5–0.75% difference between a fixed and adjustable mortgage can feel like a lifeline.

It’s not surprising, then, that more than 1 in 13 borrowers are now choosing ARMs — a figure that’s expected to climb if rates remain elevated.

Affordability at a Breaking Point

The rise in ARM applications tells a deeper story about the state of the U.S. housing market.

Simply put, affordability has collapsed.

The National Association of Realtors (NAR) reports that the housing affordability index is hovering near record lows. That means a typical family earns less than what’s needed to qualify for a median-priced home.

Even modest homes are now stretching budgets to the limit.

First-time buyers — once the lifeblood of the housing market — are being squeezed hardest. Many are choosing between renting longer or taking a calculated risk with an adjustable-rate loan.

In effect, ARMs have become a financial pressure valve, helping buyers temporarily manage the mismatch between home prices and wages.

Short-Term Relief vs. Long-Term Risk

While ARMs offer short-term relief, they also carry long-term risks that every buyer must understand before signing the dotted line.

The Consumer Financial Protection Bureau (CFPB) warns:

“With an ARM, the interest rate and monthly payment may start out low. However, both the rate and the payment can increase very quickly.”

This isn’t fearmongering — it’s reality.

If interest rates remain high five years from now, borrowers could face payment shocks of 20–30% or more when their rates adjust. That could mean hundreds — or even thousands — of extra dollars per month.

In the worst-case scenario, homeowners might be forced to sell or refinance into higher rates they can’t afford.

This is why financial advisors emphasize caution. ARMs can be powerful tools when used strategically, but they demand discipline, planning, and flexibility.

Who Should (and Shouldn’t) Consider an ARM

Not every buyer is a good fit for an adjustable-rate mortgage.

Here’s a simple framework to help decide:

✅ Good candidates for ARMs:

Buyers planning to move or refinance within 5–7 years
High-income borrowers with strong savings buffers

Investors purchasing rental properties for short-term holds

❌ Buyers who should avoid ARMs:

First-time homeowners without financial flexibility
Those on fixed or limited incomes

Buyers planning to stay in the same home for 10+ years

If you fall into the first group, an ARM might make sense — especially if you expect to refinance once rates fall. But if stability and predictability matter most, the fixed-rate option is still safer.

The Macro Picture: Inflation, Rates, and the Fed

The ARM trend can’t be separated from the larger economic picture.

Inflation, though cooling slightly, remains sticky — especially in housing, energy, and services. That’s convinced markets the Federal Reserve will keep rates “higher for longer.”

As MBA’s Fratantoni puts it:

“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, will stay higher for longer.”

This “higher for longer” policy has slammed the brakes on overall mortgage demand. Both purchase and refinance applications are down sharply year-over-year, and many economists now believe housing may not see real recovery until mid-2025.

Lessons From the 2008 Crisis — Without the Chaos

Whenever ARMs start trending, critics inevitably point back to 2008. But today’s lending landscape is fundamentally different.

In 2006–2008, many ARM borrowers qualified with no income verification, teaser rates, or balloon loans. When rates reset, defaults exploded.

Now, underwriting standards are far stricter. Borrowers must prove income, meet debt-to-income limits, and undergo stress testing for future rate increases.

So while ARMs still carry risk, today’s borrowers are far better positioned to handle those changes responsibly.

That said, lenders and regulators remain cautious. Even a small miscalculation in affordability could ripple through local markets, especially in high-cost metros like Phoenix, Austin, and Tampa, where buyers already stretch budgets to the max.

How Buyers Can Use ARMs Strategically

If you’re considering an adjustable-rate mortgage, don’t treat it as a gamble — treat it as a calculated strategy.

Here’s how smart buyers are approaching it:

Understand your time horizon. If you plan to sell or refinance before the rate adjusts, ARMs can save thousands.

Know the rate caps. Always ask how high your rate can climb in each adjustment period and over the loan’s lifetime.
Build a financial buffer. Keep at least 6–12 months of payments in savings in case rates rise unexpectedly.
Track refinancing windows. Watch rate movements closely and refinance early if opportunities arise.

Work with an experienced loan officer. ARMs are complex — having a trusted pro makes a world of difference.

Used wisely, an ARM can function as a short-term bridge — helping buyers step into ownership now, while waiting for long-term rates to cool.

The Psychological Side: Fear, Flexibility, and Hope

For many buyers, choosing an ARM isn’t just about math — it’s about mindset.

In uncertain times, flexibility is power.

An ARM can provide that flexibility: the ability to buy now, adapt later, and pivot as the market evolves. It’s not about “beating the system,” but rather working within it with eyes wide open.

Yes, there’s fear — fear of rate hikes, payment jumps, and another downturn. But there’s also opportunity for those willing to plan ahead and stay nimble.

Looking Ahead: The Next Chapter for ARMs

As long as fixed mortgage rates stay above 7%, expect ARM demand to grow.

Some lenders are even developing hybrid ARM products with longer fixed periods (like 10/6 or 15/10 ARMs) to balance affordability with stability.

If the Federal Reserve manages a “soft landing” and inflation eases, rates could dip by late 2025 — giving many ARM borrowers a chance to refinance into safer, long-term loans.

Until then, ARMs will remain a crucial tool in keeping the housing market moving — especially among younger buyers navigating one of the most challenging affordability crises in modern history.

Key Takeaways: What Today’s ARM Trend Tells Us

ARM applications are up to 7.8% — the highest level of 2024.
5-year ARM rates average 6.60%, offering short-term relief vs. 7.29% fixed rates.

Buyers are seeking creative ways to offset high borrowing costs.
ARMs provide flexibility but demand careful risk management.
The market’s shift signals deep affordability stress — and buyers adapting in real time.

FAQs: Adjustable-Rate Mortgages in 2024

What’s driving the rise in ARM applications?

A: The increase in ARM applications is driven by high mortgage rates and shrinking affordability. Many buyers choose adjustable-rate mortgages for short-term relief, benefiting from lower initial payments compared to fixed-rate loans.

Are ARMs safe in 2024?

A: ARMs are safer than during the 2008 crisis thanks to tighter lending standards. However, they still carry payment risk if interest rates rise sharply, so careful planning is essential before committing.

How long is the fixed period on most ARMs?

A: Most ARMs have fixed periods of 5, 7, or 10 years. Generally, shorter fixed periods offer lower initial rates, while longer periods provide more stability but slightly higher starting payments.

When does an ARM make sense?

A: An ARM makes financial sense if you plan to move or refinance within the first 5–7 years. This strategy allows you to benefit from lower initial payments without long-term exposure to rising rates.

Can I refinance out of an ARM later?

A: Yes, borrowers can refinance into a fixed-rate mortgage if interest rates drop or their financial situation improves, reducing long-term risk and creating predictable payments.

What’s the biggest mistake buyers make with ARMs?

A: The biggest mistake is assuming rates will always fall. Buyers should always plan for worst-case scenarios, ensuring they can manage payments even if rates rise sharply.

External Resource:

Learn more from the Consumer Financial Protection Bureau (CFPB) about adjustable-rate mortgages and their risks.

About the Organization

Legacy Alliance empowers individuals to take control of their financial future through expert guidance in real estate and alternative investments. With a focus on education, sustainable wealth-building strategies, and personalized investment solutions, Legacy Alliance helps clients navigate high-cost housing markets, maximize returns, and build long-term financial security.

Homebuyers Turn to Adjustable-Rate Mortgages as Housing Affordability Worsens