ARM borrowers may see monthly payments spike at first rate adjustment
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Thousands of homeowners with adjustable-rate mortgages may soon face a potential spike in the interest rate that’s applied to their loan.
About 150,000 borrowers with ARMs are scheduled to see their interest rates adjust for the first time this year, with another 186,000 facing their first adjustment in 2027 and 155,000 doing so in 2028, according to ICE Mortgage Technology, a mortgage data and technology company. Of this year’s total, ICE data provided to CNBC shows about 64,000 were scheduled for their first adjustment between August and December.
Because rates have climbed since many of these borrowers took out their loans, their monthly payments may jump by hundreds of dollars — and in some cases, more than $1,000, according to ICE data. Meanwhile, a small share could see their rate and monthly payment go down.
Unlike a fixed-rate mortgage, an ARM has an interest rate that can change over time. ARMs often start with an introductory rate that’s lower than on fixed-rate loans, but after an initial period — often five, seven or 10 years — the rate begins adjusting. Once they begin, those resets typically happen every six months or one year and can raise or lower the homeowner’s monthly payment.
“Basically, when you took out that adjustable-rate mortgage, you got a little bit lower rate in exchange for the possibility that rates could rise and you could be adversely affected,” said Laurie Goodman, fellow and founder of the Housing Finance Policy Center at the Urban Institute, a nonprofit think tank. “Well, unfortunately that scenario happened.”
ARMs are a small slice of 55.4 million mortgages
There are 3.1 million outstanding ARMs, the largest volume in 5.5 years, according to ICE. Most of them — 2.05 million — are still in their initial fixed period, and 1.05 million have matured into their adjustable phase, ICE data shows.
ARMs make up just 5.6% of the roughly 55.4 million active mortgages in the U.S.
Exactly how much borrowers will see their rates adjust depends partly on their introductory rate. Additionally, caps limit how much the rate can rise or fall. For example, a loan might have a 2 percentage point limit at the first adjustment, a 1-point limit for each subsequent adjustment and a maximum 5 points over the life of the loan.
The average initial rate on a so-called 5/1 ARM — one whose introductory rate lasts five years and then adjusts once a year thereafter — is about 6.65% as of Monday, according to Bankrate. ARMs accounted for 10.3% of mortgage applications in the week ended Oct. 2, up from 5.9% in the week ended Oct. 4, 2024, according to the Mortgage Bankers Association.
While that average introductory rate is lower than the average rate on a fixed-rate 30-year mortgage — 7.48% as of Friday, according to Mortgage News Daily — it’s significantly higher than the initial rates offered when many ARMs were first obtained.
For example,…
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