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Published: May 27, 2022 8 min read
Illustration of a hand turning a know to increase the ARM percentage rate, where the arrow is in a shape of a house
Kiersten Essenpreis for Money

More homebuyers are turning to adjustable-rate mortgages as interest rates on fixed-rate loans rise. The potential short-term savings are huge — but so are the potential downsides.

As of May 20, ARMs accounted for over 9% of all mortgage applications, according to the Mortgage Bankers Association. At the start of the year, ARMs made up just 3.1% of loan applications, which is more typical.

The rush to ARMs comes as the average interest rate on the uber-popular 30-year fixed-rate loan has surged past 5%. Meanwhile, the average rate on the most common adjustable-rate loan — a 5/1 ARM — has increased at much a slower pace to around 4%.

At roughly current mortgage rates, borrowers opting for a 5/1 adjustable-rate mortgage on a median-priced home could save over $15,000 over the first five years of the loan compared to a 30-year fixed-rate mortgage, according to real estate brokerage Redfin. That’s about $260 per month.

“People are looking for more ways to expand affordability and an ARM, in certain circumstances, provides certain borrowers with that flexibility,” says Brian Rugg, chief credit officer for mortgage lender loanDepot.

In particular, Rugg points out that buyers who have been looking for a home for a while but haven’t been able to find one could counteract the loss of affordability and extend their buying power by turning to an adjustable-rate loan.

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How ARMs work — then and now