As 2024 progresses, hundreds of thousands of American homeowners might witness a significant rise in their mortgage payments. This increase could be especially impactful for those who secured cheaper, short-term Adjustable-Rate Mortgages (ARMs), as these loans are due for renewal amid a period of elevated borrowing costs.
ARMs typically offer lower rates for an initial period ranging from three to ten years. However, once this term ends, borrowers must often refinance at current market rates, which are substantially higher compared to the historically low rates of recent years.
Significant Impact on ARM Borrowers
According to Bloomberg, around 1.7 million homes purchased with ARMs since 2019 are set to reach the end of their term this year. For many homeowners, this transition could lead to a substantial increase in monthly payments.
For instance, a five-year ARM taken out in 2019 with an average loan size of $791,100 at a 3.3 percent interest rate resulted in monthly payments of approximately $3,465. Currently, the rates for five-year ARMs have climbed to about 6.5 percent, almost doubling the initial rate. This change implies that a homeowner might need to pay nearly $1,000 more each month if they refinance at the new rate.
"A borrower that took an adjustable rate mortgage and neglected to refinance when fixed mortgage rates were at record lows in 2020-2021 are paying for that now," Greg McBride, chief financial analyst at Bankrate, told Newsweek. "With the Federal Reserve having pushed interest rates up at the fastest pace in 40 years, a borrower facing an ARM adjustment now could see their rate jump to 8 percent."
Rising Mortgage Rates Add Pressure
Mortgage rates have steadily risen, with the 30-year fixed rate surpassing 7 percent. As of the latest survey from the Mortgage Bankers Association, the 30-year fixed rate hit 7.05 percent, marking the highest level since early May. The increasing rates have added stress to ARM borrowers, many of whom are worried about meeting their future payment obligations.
A recent poll by CivicScience Inc. for Bloomberg revealed that around 10 percent of ARM borrowers might struggle to meet their obligations or could postpone payments when their rates adjust.
"They could run into some trouble, especially on these large loan amounts as their ARMs come out of the fixed period," Chris Stearns, a mortgage loan adviser at Thrive Loans, told Bloomberg. "Your payment's gonna almost double and it's not gonna be pretty."
Future Outlook and Risks
Bloomberg reports that nearly 2 million ARM mortgages, averaging about $1 million each, are nearing their adjustment periods. Approximately 300,000 are due this year, with another 100,000 expected to face adjustments over the next year. ARMs constitute about 10 percent of all mortgages.
Some borrowers are hoping that the Federal Reserve might lower interest rates in the near future, which could make refinancing more affordable. The central bank had raised rates to combat inflation, which had peaked at 9 percent but has since cooled down, moving closer to the 2 percent target. If inflation continues to decrease, policymakers may consider reducing rates, potentially easing mortgage costs.
However, McBride warns that relying on ARMs can be risky. "Taking an adjustable rate mortgage at this point is a gamble that interest rates will fall quite significantly from current levels by the time your initial rate adjustment comes around," he told Newsweek. "The initial savings on an ARM are pretty scant as the difference between fixed and adjustable rates is small, and in some cases nonexistent. You'd need to see interest rates fall quite a ways before you realize any meaningful reduction in monthly payment when the loan adjusts."
As the year unfolds, homeowners with ARMs need to stay informed and consider their refinancing options carefully to mitigate potential financial strain.