Mortgage rates are soaring, with 5-year adjustable-rate mortgages (ARMs) hitting 7.67% and 7-year ARMs at 7.56%. Meanwhile, fixed-rate mortgages dominate 92% of U.S. lending. Here’s what you need to know.
Why Are ARM Rates Rising?
According to Zillow data analyzed by Fortune, ARM rates have surged due to market volatility. Key factors include:
- Federal Reserve policies impacting benchmark rates
- High inflation driving up borrowing costs
- Increased lender margins (2%-3.5%) added to SOFR
Fixed-Rate Mortgages Dominate 92% of U.S. Lending
Fixed-rate mortgages remain the preferred choice for stability. Here’s why:
| Feature | Fixed-Rate | ARM |
|---|---|---|
| Rate Stability | Yes | No |
| Popularity | 92% | 8% |
| Best For | Long-term homeowners | Short-term buyers |
Who Should Consider an Adjustable-Rate Mortgage?
ARMs can be strategic for:
- Starter home buyers planning to sell before rate adjustments
- Investors minimizing upfront costs
- Borrowers in high-rate markets seeking initial savings
Risks of Adjustable-Rate Mortgages
ARMs come with volatility risks:
- Unpredictable payment hikes after the fixed period
- Complex terms (e.g., 5/1 ARM vs. 10/6 ARM)
- Refinancing costs if switching to fixed-rate later
Actionable Insights for Borrowers
If you’re considering an ARM:
- Compare caps and adjustment frequencies
- Plan for potential rate increases
- Consult a mortgage advisor for refinancing options
Final Thought: While fixed-rate mortgages dominate, ARMs offer niche benefits—but require careful planning to avoid financial shocks.
FAQs
Q: What is a 5/1 ARM?
A: A 5/1 ARM locks the rate for five years, then adjusts annually.
Q: Can I refinance an ARM to a fixed-rate mortgage?
A: Yes, but it involves closing costs and lender approval.
Q: Why do lenders add margins to ARM rates?
A: Margins (2%-3.5%) cover lender risk and profit.
Q: Are ARMs riskier than fixed-rate mortgages?
A: Yes, due to potential payment increases after the fixed period.
