An adjustable-rate mortgage is a loan that finances the purchase of a home with an interest rate that changes periodically, unlike a fixed mortgage loan that stays unaltered for the length of the term. It’s a tempting financing arrangement because an ARM starts with a low fixed rate during the introductory period, which typically is three, five, seven, or ten years. They became very popular again in 2022 when the rates started climbing after the incredibly low rates of the pandemic, predicting them to come back down once the “soft landing” from the “highs” of the pandemic economy was achieved.

They were very popular before the 2008 crash (1/3 of loans were ARMs), then regulations changed to soften the huge, yet not always perceived, risk that ARM borrowers took, and they nosedived until they resurged in mid-2022. Adjustable Rate Mortgages were up to 10% of the market share, up from 3% in 2020! They more than trebled!
When the introductory period expires (teaser period), the interest rate changes regularly, based on a benchmark index, which was thought by many to be much lower than it really is now.
There was a generally accepted narrative of a reverse of the climbing trend of interest rates, supported by many in the real estate industry and concisely expressed in the slogan “Date the rate, marry the house“. They implied that refinancing or, even better, the reindexing of an ARM would bring monthly payments to a much lower level.

The hot residential real estate market of high demand, coupled with the low inventory & supply of homes, pushed many who bought the narrative of soon-lowering rates to apply for tempting Adjustables, which start significantly lower than Fixed Rate Mortgages, thinking that after the intro period, the adjustments would happen in a lower rate environment.
Unfortunately, it looks like higher rates have a high chance of staying, as expressed in the “Higher for longer” slogan that hasn’t been embraced as easily as the “Date the rate, marry the house” one. One of the non-voting members of the FOMC (Federal Open Market Committe, of the Federal Reserve “The Feds”) actually said it even better: “Meaningfully higher for longer”.

ARMs typically have an easier introductory period of 3, 5, 7, or 10 years, and then the rates adjust to the broader lending market rates. That means those who financed their new home, enjoying the lower monthly payments of the first few years, may land at higher than expected interest rates and find out that their hoped-for adjustment down could actually be up. Much higher payments than expected could easily put them in financial distress. Many took out high-interest loans, planning on taking the hit for a few months or years while counting on the ability to refinance soon enough down the road.

The 3-year ARMs that were taken out in 2022 when interest rates started climbing sharply are going to be up next year, in 2025, just over 12 months from now.
That financial challenge may be a big enough issue for many to decide to list their homes for sale, maybe downsize or find alternative housing, or maybe move to locations with more affordable housing. Or maybe some will hold on and inevitably fall into preforeclosure territory; maybe foreclosure rates will climb much more than they are right now, catching up on the delays of the pandemic moratoriums and forebearances.

That should create some movement in the Real Estate Market for the joy of all transactional real estate operators and home buyers.

This clearly doesn’t apply to homeowners /ARM borrowers who planned on moving in the short term anyway. However, what about those who planned to move but have now changed plans (it happens all the time)? they would be in a tough predicament.

Of course, there are so many factors pulling and pushing in the real estate market that, per se, it may not be able to make a big difference in the housing market, but sometimes even little factors can trigger a domino or even snowball effect in the real estate world.

If you’re into home buying, as a Real Estate Agent, Real Estate Broker or a home buyer, professional or private, find out who has the 3-year #ARMs and you may have some great selling leads right there!

It would be smart for sellers and professionals to start planning for it ahead of time, so be ready.

BTW, @ Proxima Investors we’re interested too as real estate investors & homebuyers, at full price if the terms are right. So, let me know what’s coming up, and we can discuss as many deals and terms as you want.

Watch out and be prepared!

A few 2022 stats about ARMs:

In mid-2022, adjustable-rate mortgages made up nearly 10% of all new home loan applications, according to the Mortgage Bankers Association (MBA), as the ARM loan rates were over 1% less than fixed mortgage loans and stayed that way throughout the whole year.
According to Freddie Mac, the average rate for a 30-year, fixed-rate mortgage (FRM) was 5.54% during the week ending July 21, 2022. That same week, the average rate for a 5/1 ARM was just 4.31%.