Houston, TX - Thousands of homeowners across the United States are preparing for significant increases in their monthly mortgage payments due to the resetting of adjustable-rate mortgages (ARMs). Jennifer Hernandez, a Houston resident, was stunned when she received notice last year that her mortgage payments would jump by about $2,000 per month.
Hernandez refinanced her home in 2016 with an ARM, benefiting initially from a low introductory rate. Unlike fixed-rate mortgages, ARMs have a fixed period followed by periodic adjustments based on market conditions. When interest rates rise, homeowners like Hernandez face steep increases in their payments.
The Rising Trend of Adjustable-Rate Mortgages
According to data from Intercontinental Exchange, a global provider of technology and data, 1.7 million homeowners have opted for ARMs since 2019. Among these, 328,000 homeowners have already experienced rate resets, and another 102,000 will face adjustments within the next 12 months. This trend has contributed to one of the most unaffordable housing markets in decades.
ARMs gained notoriety during the 2007-2008 subprime mortgage crisis, leaving many unable to afford their payments when rates reset. Despite this, the share of homebuyers choosing ARMs has doubled over the past four years, according to the Mortgage Bankers Association.
Personal Stories and Expert Opinions
Loan consultant Lorraine Jones advises that ARMs may be suitable for buyers comfortable with the risk of interest rate increases or those planning to move or refinance before the fixed rate expires. However, she emphasizes the importance of understanding the loan's details.
Hernandez, a loan officer herself, had misremembered the terms of her $1.1 million loan, thinking she had a 10/1 ARM instead of a 7/1 ARM. Last October, her mortgage rate jumped to 5.125%, the maximum allowed in the first adjustment year. Hernandez's ARM is capped at 8.125%, five percentage points above her initial rate. She now faces the challenge of making ends meet with potentially higher payments on the horizon. “I just got caught blindsided,” she said. “Life gets in the way, and you get busy. I’ve been slammed with kids and work for the last seven years.”
Andrew Marquis, a loan officer in Lexington, Massachusetts, notes a dramatic increase in ARM applications. He suggests that homebuyers believe the Federal Reserve might cut interest rates soon, allowing them to refinance before their ARM's fixed period ends. Marquis highlights that ARMs can offer significant savings compared to fixed-rate mortgages, especially for those with a higher risk tolerance. “I would say on the jumbo loans we’re doing, probably 40% of the loans are doing ARMs,” Marquis said, referring to loan amounts above $766,000.
The Unpredictable Future of Interest Rates
Interest rates remain unpredictable. Hernandez reflects on her decision to choose an ARM in 2016. While she saved money during the initial period, she now faces uncertainty with her upcoming rate adjustment. “I’ve made it work, but now I’m going to have to figure out how to make it work again this October,” she said. “It’s stressful having to worry about it.” Hernandez added, “This increase in payments hasn’t felt good. I’m just praying that when my October adjustment comes around, rates have come down a little bit.”
As homeowners like Hernandez channelize the complexities of ARMs, the broader market continues to struggle with the implications of fluctuating interest rates and the increasing costs of homeownership.