From Time:

Experts say adjustable-rate mortgages (ARMs) are an attractive option due to high interest rates and potential future rate drops. ARMs offer immediate savings with lower initial rates but come with risks, making them suitable only for borrowers with financial flexibility. The Fed’s signals of future rate cuts have increased the appeal of ARMs over fixed-rate loans.

Amid high interest rates, adjustable-rate mortgages (ARMs) have surged in popularity, making up 10.7% of mortgage activity last fall compared to just 3% in December 2021. ARMs are now gaining traction due to unbearably high interest rates, with more borrowers considering this option for mortgage relief.

The average rate for 5/1 ARMs is currently 6.14%, which is 0.6 percentage points lower than the average rate for fixed-rate mortgages at 6.75%. The initial rate on ARMs is usually 0.5 to 1 percentage point lower than fixed rates, offering potential savings for borrowers. ARMs have potentially lower rates and the ability to adjust according to benchmark rates.

Adjustable-rate mortgages (ARMs) have an introductory period with lower rates, followed by adjustments based on benchmark interest rates. The financial savings are immediate with initial rates but can come with significant adjustments after the intro period. ARMs are suitable for borrowers with plans to sell or refinance in a few years, as they come with risks and uncertainty.

Despite the potential savings and lower initial rates, adjustable-rate mortgages (ARMs) should be approached with caution and risk tolerance. ARMs are only beneficial for borrowers with a high risk tolerance or those planning to sell or refinance within a few years. For others, the traditional fixed-rate mortgage remains the most reliable option.



Read more: Are Adjustable-Rate Mortgages a Good Idea Right Now?