If you've been looking for a house recently, you've likely noticed how high mortgage rates can be right now. Because of these rates and increasing home prices, many buyers are starting to consider different loan options to find a way to make their budgets work. One option that's becoming more popular is adjustable-rate mortgages, or ARMs.

If you recall the 2008 crash, it’s natural to have some worries about adjustable-rate mortgages (ARMs). However, there’s no need to worry. The ARMs available today are quite different from what they were back then. Here’s why.

In the past, many buyers were approved for loans that they ended up not being able to afford once the interest rates adjusted. Nowadays, lenders are taking a more careful approach, ensuring that you can still handle your payments if rates were to rise. So, don’t jump to the conclusion that adjustable-rate mortgages (ARMs) returning signals another market crash. What it actually reflects is that buyers are seeking innovative ways to manage affordability challenges.

The latest data from the Mortgage Bankers Association (MBA) shows a trend where more people are choosing adjustable-rate mortgages (ARMs) right now, as illustrated in the graph below.

ARMs might not be suitable for everyone, but they can offer some advantages in specific situations.

How an Adjustable-Rate Mortgage Works

Business Insider breaks it down like this: the main difference between a fixed-rate mortgage and an adjustable-rate mortgage is how your interest rate behaves over time.

““With a fixed-rate mortgage, your interest rate remains the same for the entire time you have the loan. This keeps your monthly payment the same for years . . . adjustable-rate mortgages work differently. You’ll start off with the same rate for a few years, but after that, your rate can change periodically. This means that if average rates have gone up, your mortgage payment will increase. If they’ve gone down, your payment will decrease.”
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— Business Insider

Taxes and homeowner’s insurance can still affect your monthly costs, but with a fixed-rate loan, your mortgage payment remains pretty stable. On the other hand, adjustable-rate mortgages are a different story.

Pros and Cons of an ARM

Some buyers are reconsidering adjustable-rate mortgages (ARMs) because they come with some attractive benefits, such as a lower initial interest rate. According to Business Insider, this can be a significant draw for many.

““Because ARM rates are typically lower than fixed mortgage rates, they can help buyers find affordability when rates are high. With a lower ARM rate, you can get a smaller monthly payment or afford more house than you could with a fixed-rate loan.”
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— Business Insider

If you have an adjustable-rate mortgage (ARM), keep in mind that your interest rate will change over time. According to Barron’s, this means you could end up facing higher costs down the road.

““Adjustable-rate loans offer a lower initial rate, but recalculate after a period. That is a plus for borrowers if rates come down in the future, or if a borrower sells before the fixed period ends, but can lead to higher costs if they hold on to their home and rates go up.”
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— Barron

While those upfront savings might be great to have right now, it’s important to consider what could happen when your initial rate ends and you’re still living in that home. Even though predictions suggest that rates may dip slightly over the next year or two, keep in mind that no forecast is set in stone.

It's important to have a discussion with your lender and financial advisor about all your options. You’ll want to see if an ARM is a good fit for your financial goals and how comfortable you are with taking on risk.

Bottom Line

For the right buyer, adjustable-rate mortgages (ARMs) can provide significant benefits. However, they aren't suitable for everyone. It's important to grasp how they function, consider the advantages and disadvantages, and evaluate whether they align with your financial situation. That's why consulting with a reliable lender and financial advisor is crucial before making any decisions.