As housing prices continue to rise, the cost of buying a home is steadily increasing, prompting many buyers to turn to mortgages to alleviate economic pressures.

Recently, more and more homebuyers are opting for adjustable-rate mortgages (ARMs) because they offer lower interest rates.

According to the Mortgage Bankers Association's weekly survey, during the week ending October 6th, applications for 5/1 ARMs surged by 32.5% compared to four weeks prior. This may be attributed to interest rates on these loans dropping to around 6%.

ARMs carry higher risks compared to traditional 30-year fixed-rate mortgages. This is because after the introductory period of an ARM, the loan's interest rate adjusts annually based on market rates.

Most borrowers using these loans hope that the interest rates will decrease when the initial loan term ends so they can refinance at a lower rate, or they plan to sell their homes before the rate adjustments take effect.

However, there is no guarantee that mortgage rates will necessarily drop. Many real estate experts predicted rate decreases, but the outcome has been rising interest rates. Thus, while ARMs might be a wise choice if rates drop, borrowers could also find themselves locked into higher housing payments in the future.

Borrowers seeking ARMs make up about 9.2% of all borrowers, the highest proportion since November 2022. The appeal of ARMs is bolstered by their currently lower interest rates.

Data from the MBA shows that during the week ending October 6th, the average effective interest rate for a 5/1 ARM is around 6.66%, while the average effective interest rate for a traditional 30-year fixed-rate mortgage is 7.89%. Homebuyers can reduce their rates to around 6% by choosing an ARM. However, this choice comes with associated risks.

The primary expectation of homebuyers opting for ARMs is that interest rates will decrease after the initial term, allowing for refinancing or home sale before the adjustment. Nevertheless, interest rate trends are uncertain and could rise, leading to higher future mortgage payments. Therefore, homebuyers should weigh this choice carefully, taking into account their financial situation and future rate projections.

Andrew, a mortgage broker, has noticed a growing interest in ARMs, especially among jumbo loan borrowers and investors. He also observes that government-backed loans now offer ARMs, targeting financially constrained first-time homebuyers. If priced appropriately, ARMs can be a good choice.

Despite the current lower rates for ARMs compared to traditional 30-year fixed-rate mortgages, the increase in mortgage rates, coupled with high home prices and a nationwide housing shortage, has led to a decrease in the number of homebuyers seeking any form of mortgage.

According to MBA data, ARM applications have still decreased by 34.2% compared to the previous year. Homebuyers should fully understand the risks associated with ARMs and make informed decisions after assessing their financial situation and future rate trends.