Adjustable Rate Mortgages (ARMs) have been a key piece of advice on Financial Samurai since 2009, especially during times when interest rates were falling. Back then, with people typically owning their homes for just 5-7 years, it didn’t make sense to lock in higher interest rates for longer periods. Now, with homeownership extending beyond 10 years and real estate demand soaring, the landscape looks different, but the logic behind choosing ARMs still holds strong.
Personally, I’ve benefited from following my own advice, saving over $500,000 in interest by opting for ARMs, like my current 7/1 ARM which I secured at an impressive 2.125% in 2020. Despite these personal gains, I’ve realized that the uptake of ARMs is surprisingly low—only 4.7% of total loans. This revelation is a bit disheartening as I aimed to help others enjoy similar savings.
Interest in ARMs saw a brief resurgence when mortgage rates spiked in early 2022, pushing their popularity to about 10%. This shift came as more people sought alternatives to the traditional 30-year fixed mortgages, which became significantly more expensive due to rising bond yields.
The trend away from ARMs can be traced back to their peak in 2005 when they made up about 34% of all mortgages. This decline was influenced by several factors, including a slowdown in housing demand, lower fixed-rate mortgage interest rates, and a general shift towards more stable financing options post-real estate crisis. Lenders and financial advisors began advocating more for 30-year fixed-rate mortgages, which seemed safer following significant losses in the real estate sector.
Despite not aiming to be contrarian, my recommendation for ARMs was always about financial efficiency—helping readers save and earn more, enabling them to live better. Historically, those who chose ARMs saved significantly, often benefiting from lower rates before any rate adjustments. Those savings were then funneled into investments which further improved their financial standing.
The choice between ARMs and fixed-rate mortgages depends largely on individual circumstances, especially how long you plan to stay in your home. For example, if you foresee owning your home for about a decade, a 10/1 ARM might make more sense than a 30-year fixed mortgage because it aligns better with your ownership timeline.
Ultimately, while the low uptake of ARMs is surprising given their financial benefits, the current economic environment suggests a shift might be on the horizon. As mortgage rates start to decline again, reflecting eased inflation and anticipated cuts in the Fed rates, the appeal of ARMs could grow, especially among those looking to capitalize on shorter-term savings without compromising on future financial flexibility.
