Overview of Is it time to reconsider the adjustable rate mortgage?
NPR’s The Indicator from Planet Money examines whether adjustable-rate mortgages (ARMs) deserve a second look as 30-year fixed mortgage rates remain elevated at around 7.2%. The episode revisits the stigma attached to ARMs after their role in the 2008 housing crisis, then weighs that history against decades of mortgage data showing that ARMs often saved borrowers money when rates fell.
Why ARMs Still Carry a Bad Reputation
- ARMs were heavily used during the housing boom before the Great Recession and were tied to many risky loans.
- In the early 2000s, some lenders approved borrowers based only on whether they could afford the low teaser rate, not the full reset rate.
- When rates reset higher, many homeowners were unable to keep up and lost their homes.
- Because of that history, many consumers still associate ARMs with danger and instability.
How Adjustable-Rate Mortgages Work
- ARMs usually start with a lower introductory “teaser” rate than a fixed mortgage.
- After a set period, often 5 or 7 years, the rate resets based on the market.
- Today’s ARMs are more regulated than they were before the financial crisis.
- Borrowers now have to qualify for a rate well above the teaser rate, which is meant to reduce risk.
What the Data Shows
- Rocket Mortgage/Redfin economist Chen Zhao analyzed mortgage data going back to 1971.
- Her team asked: if someone had chosen an ARM instead of a 30-year fixed mortgage, would they have had a chance to refinance into a lower rate?
- Result: about 70% of the time, ARM borrowers had at least one opportunity to reset into a lower rate.
- That suggests ARMs often worked out favorably over the long run, especially when rates trended downward.
- In many cases, ARM borrowers effectively got a “free refinance” and ended up with slightly lower monthly payments.
The Big Caveats
1. History may not repeat itself
- The long period of declining rates may have been unusual.
- If rates stay high or rise further, ARMs could become more expensive rather than cheaper.
2. Borrowers are not spreadsheets
- Even if an ARM looks better on paper, many people do not want the stress of wondering whether their payment will jump.
- Emotional comfort and payment certainty matter, especially for families with tight budgets.
Where the Market Stands Now
- ARMs are making a comeback.
- They now make up about 11% of new mortgage applications, the highest share in more than a year.
- The appeal is straightforward: lower upfront monthly payments, often around 50 basis points below a fixed rate.
- U.S. Bank estimates that 700,000 to 1 million ARMs could reset next year, including loans originated in 2017, 2020, and 2022.
Who ARMs May Be Best For
- Research from the St. Louis Fed suggests ARMs are more attractive to:
- younger borrowers
- higher-income households
- people with enough financial cushion to handle possible payment increases
- Mortgage counselors working with low- and moderate-income buyers generally prefer fixed-rate loans.
- For borrowers with steady but limited income, the predictability of a fixed mortgage is often worth paying a bit more.
Bottom Line
ARMs are no longer the automatic red flag they became after the housing crash, and the historical data suggests they often saved borrowers money. But whether they are a good choice depends heavily on the borrower’s income stability, risk tolerance, and how long they plan to keep the home. In today’s high-rate environment, ARMs can be tempting—but they are still best suited for buyers who can comfortably absorb future payment changes.