Thousands see monthly payments soar as ARM rates reset
Thousands of homeowners with adjustable-rate mortgages (ARMs) are bracing for significantly higher monthly payments this year as their loans reset to current market rates.
According to data from Intercontinental Exchange (ICE), 328,000 ARM loans have already reset, with another 102,000 set to adjust over the next 12 months. This comes as mortgage rates remain elevated, contributing to one of the most unaffordable housing markets in decades.
Jennifer Hernandez, a Houston homeowner, experienced this shock firsthand when her mortgage payment jumped by about $2,000 per month last year.
“I just got caught blindsided,” Hernandez told CNN News. “Life gets in the way, and you get busy. I’ve been slammed with kids and work for the last seven years.”
Hernandez refinanced her $1.1 million home loan in 2016 using a 7/1 ARM, which offers a fixed rate for the first seven years before adjusting annually. Last October, her rate increased from 3.125% to 5.125%, the maximum allowed in the first adjustment year.
Despite their risks, ARM loans have gained traction in recent years. ICE reports that 1.7 million homeowners have purchased homes with ARMs since 2019. According to the Mortgage Bankers Association, the share of homebuyers using ARM loans has doubled over the past four years.
Read next: Our adjustable-rate mortgage guide for the USA
Lorraine Jones, a loan consultant in Southern California, suggests that ARMs may be suitable for homebuyers comfortable with interest rate risk or those planning to move or refinance before the fixed rate expires. However, she cautions that close attention to loan details is crucial.
Andrew Marquis, a loan officer in Lexington, Massachusetts, has noted a recent surge in ARM loan applications.
“I would say on the jumbo loans we’re doing, probably 40% of the loans are doing ARMs,” Marquis said, referring to loans above $766,000.
Marquis added that some homebuyers are betting on potential Federal Reserve interest rate cuts in the coming years, giving them time to refinance before their ARM’s fixed period ends. However, the Fed has only signaled one possible rate cut this year.
For homeowners like Hernandez, the future remains uncertain.
“I’ve made it work, but now I’m going to have to figure out how to make it work again this October,” she said. “It’s stressful having to worry about it.”
Hernandez’s loan is capped at 8.125%, five percentage points above her initial fixed rate. While she has opted not to refinance yet, she remains hopeful for lower rates in the future.
“I’m just praying that when my October adjustment comes around, rates have come down a little bit,” Hernandez said.
As more ARM loans reset in the coming months, thousands of homeowners may face similar challenges, potentially exacerbating affordability issues in an already strained housing market.
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