Thousands of homeowners with adjustable-rate mortgages are about to get hit with higher monthly payments


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Single-family homes in a residential neighborhood in San Marcos, Texas, U.S., on Tuesday, March 12, 2024. As mortgage rates remain high, adding fuel to one of the most expensive housing markets in decades, ARMs have gained momentum.



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Last year, when Jennifer Hernandez received notice that the mortgage payment on her Houston home would increase by nearly $2,000 a month, she was stunned.

Hernandez refinanced his home loan in 2016 using an adjustable-rate mortgage loan, which has a lower introductory rate for a fixed initial period.

Unlike the more popular fixed-rate mortgage loans, ARMs can provide temporary relief for homebuyers who want to avoid paying higher mortgage rates – however, they also come with risks. After a fixed introductory period – usually five, seven or ten years – the rate on an ARM loan adjusts periodically based on current market conditions.

This means that when mortgage rates rise, many ARM loan holders like Hernandez face the unpleasant shock of significantly higher monthly house payments. For thousands of Americans like Hernandez who took out ARM loans five years ago, before interest rates hit four-decade highs, that shock is coming this year.

Mortgage rates remain high, fueling one of the most expensive housing markets in decades. This fueled the boom of ARMs, despite their drawbacks.

According to data from Intercontinental Exchange, a global provider of technology and data, 1.7 million homeowners have purchased homes with adjustable-rate mortgages since 2019. Many buyers who purchased 5-year ARMs — one of the more popular offerings — will be moving into significantly higher monthly payments this year.

According to ICE, fixed periods on these ARMs have already been set for 328,000 homeowners — and 102,000 more loans will be set over the next 12 months.

ARM loans suffered a bad reputation following the subprime mortgage crisis of 2007 and 2008, as many home buyers were unable to make their monthly home payments after their interest rates were restructured.

Although the rate of homebuyers choosing ARMs has never reached pre-2008 levels, the share of homebuyers using ARM loans has doubled over the past four years, according to the Mortgage Bankers Association.

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Lorianne Jones, a loan advisor in Southern California, told CNN that ARMs may be suitable for homebuyers who are comfortable bearing the risk of interest rate increases, or who plan to move home or refinance before the fixed rate expires.

But when selecting an ARM, it's important to keep a close eye on the details, otherwise things can get tricky fast.

Hernandez, himself a loan officer, had misremembered the terms of his $1.1 million loan: Instead of a 10/1 ARM, which has a fixed rate for the first ten years and resets every year after that, Hernandez had a 7/1 loan.

“I was suddenly caught up,” she said. “Life throws obstacles, and you get busy. I've been busy with kids and work for the last seven years.”

Last October, Hernandez's mortgage rate rose 2% to 5.125%, the maximum rate allowed in the first adjustment year, according to his loan terms.

Most ARM loans come with an interest rate cap to keep costs from getting out of control. Hernandez said his ARM is capped at 8.125%, five percentage points higher than his initial fixed rate.

According to Hernandez, it didn't make sense to refinance the loan while the 30-year fixed mortgage rate was higher than her new adjusted rate. But this coming October, she suspects her monthly payments will adjust higher.

“I got it working, but now I have to figure out how to make it work again this October,” he said. “It's stressful to worry about it.”

Andrew Marquis, a loan officer in Lexington, Massachusetts, said he has seen a dramatic increase in ARM loan applications recently. He said homebuyers believe the Federal Reserve will cut interest rates in the next few years, giving these buyers time to refinance their loans before their ARM's fixed term expires. The Fed doesn't directly set mortgage rates, but its actions influence them. This year, the Federal Reserve has hinted it might possibly cut its benchmark interest rate once.

“I would say probably 40% of the jumbo loans we're offering are ARMs,” Marquis said, referring to loan amounts over $766,000.

Marquis said taking out an ARM loan can be beneficial for those who can take on more risk.

“If people can save half a percent on a seven-year ARM compared to a 30-year fixed term, they're saving hundreds of dollars a month,” he said.

Interest rates can be unpredictable. Hernandez said she saved money in the first seven years of her loan, but if she could do it over again, she likely wouldn't have chosen an adjustable-rate mortgage in 2016.

“This increase in payments doesn't feel good,” she said. “I'm just praying that when my October adjustment comes, rates will go down a little bit.”

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