More homebuyers are turning to adjustable-rate mortgages (ARMs) as fixed rates climb past 7 percent, and tens of thousands of borrowers who chose ARMs in 2020 face a typical payment increase of more than $1,000 a month next year.
ARMs accounted for close to 11 percent of mortgage rate locks during the week of Sept. 18, the largest share since late 2022, according to the October “Mortgage Monitor” report from Intercontinental Exchange (ICE). The 74,000 borrowers with seven-year ARMs from 2020 face an estimated median payment increase of $1,066 a month when their fixed periods end in 2027.
Mortgage rates climbed past 7.5 percent last week, Inman reported. ICE’s own index of 30-year fixed rates crossed 7 percent for the first time in 20 months and reached 7.31 percent on Sept. 30, following a quarter-point rate increase from the Federal Reserve in September.
By the numbers
All figures are from ICE.
- 17.5 percent: ARM share of refinance rate locks the week of Sept. 18, the highest since weekly tracking began in 2019
- $2,383: Monthly principal and interest payment on a median-priced home with 20 percent down at the 7.2 percent rate recorded Sept. 24
- More than half: Homebuyers who paid at least half a point in upfront fees to lower their rate in August, up from 46 percent a year earlier
- 186,000: ARMs with fixed periods ending in 2027, up from 148,000 this year
- 3.1 million: Active ARMs, the most in about 5.5 years and 5.6 percent of active mortgages
More homebuyers turn to ARMs
Close to 9 percent of homebuyers who locked a rate during the week of Sept. 18 chose an ARM, the second-highest weekly share since 2022, according to ICE.
The rise in rates erased the affordability gains recorded at the start of the year, ICE reported. The monthly payment on a median-priced home took 31.7 percent of median household income in late September, up from 27.6 percent in January.
Purchase mortgage applications fell 8 percent over the three weeks ending Sept. 18, according to Mortgage Bankers Association data cited in the report.
New ARM borrowers have years before the rate can change. About 90 percent of new ARMs carry a fixed rate for at least five years, and half are fixed for at least seven, ICE reported.
Borrowers from 2020 face the largest ARM resets
A first reset marks the end of an ARM’s fixed period, when the rate begins to adjust. ICE estimates the median borrower reaching that point in 2027 will see a rate increase of about 2.2 percentage points and a payment increase of $645 a month, or 24 percent.
Borrowers with seven-year ARMs from 2020 carry a median balance of $629,000 and a median rate of 2.75 percent. ICE estimates that rate will rise to 5.79 percent at the first reset. The payment increase for that group grows from $1,066 to $1,269 a month, or 43 percent, after later adjustments, because caps limit how far a rate can rise at each one, according to the report.
Scheduled first resets climb to 252,000 in 2029 and 425,000 in 2032, according to the report.
Most ARM borrowers remain in fixed periods
“ARMs are becoming more attractive to borrowers looking for relief from today’s higher fixed rates, but the overall market exposure to adjustable payments remains relatively limited,” Andy Walden, head of mortgage and housing market research at ICE, said in a statement.
About a third of active ARMs, or 1.05 million loans, have moved past their fixed periods and carry adjusting rates, the fewest in the 25 years ICE has tracked the figure. More than 90 percent of ARMs originated since 2022 remain in their fixed periods.
What the Fed increase costs current borrowers
For borrowers whose ARMs are adjusting, ICE estimates the September increase adds a median $14 to the monthly payment, assuming the full quarter point reaches their loans. The estimate is $53 for loans taken out since 2022, which carry a median balance of $340,000. If the Fed raises rates by a full percentage point in total, which ICE said futures markets expect, the overall median increase would be $56 a month.
Home equity lines of credit (HELOCs) reset each month and track the prime rate, so the increase reaches those borrowers within a month or two, according to ICE. The company estimates a $9 monthly increase for the median borrower with a HELOC behind a primary mortgage, who carries a $44,000 balance at 7.4 percent.
