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Adjustable-rate mortgages are back. Should you trust them?

Kat Aoki January 6, 2026 at 9:36 PM

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Adjustable-rate mortgages are back. Should you trust them? (Richard Drury via Getty Images)

If you remember the 2008 housing crash, “adjustable-rate mortgages” might still conjure predatory lenders and underwater homeowners. That association isn't just earned — it's backed by staggering numbers.

The numbers explain it: In late 2007, 16% of subprime ARM borrowers were at least 90 days delinquent or facing foreclosure, triple the amount from 2005. By spring 2008, that figure hit 25%, meaning one in four borrowers was in serious trouble.

Now, fast-forward to September 2025: ARMs account for 2.9% of all mortgage applications — their highest share since 2008.

The question isn’t whether ARMs are back. It’s whether they’ve changed enough for you to consider one.

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What’s actually changed since 2008

After the housing crash, Congress passed the Dodd-Frank Act, which introduced new regulations focused on preventing a repeat of 2008. Though some protections were rolled back in 2018, with weakened enforcement under the recent administration, key ARM safeguards designed to protect borrowers remain:

Ability-to-repay requirements. Lenders must now confirm that borrowers can afford the loan at its highest possible rate — not just the initial teaser rate. This is the foundation of Qualified Mortgage (QM) rules under Dodd-Frank.

Mandatory rate caps. Federal law requires all ARMs to limit the maximum interest rate over the term of the mortgage. (Before 1987, many ARMs had no caps at all — or caps so high, they were meaningless.)

Ban on riskiest features. Qualified Mortgages prohibit negative amortization (where your balance grows even while making payments) and interest-only payment periods that fueled the crisis. (Non-QM loans — including interest-only ARMs from major banks — still exist but typically cost more and require larger down payments.)

🔍 Read more: 'Mortgage rates tumble': Is it finally time to refinance your home loan?

What the reforms didn't fix

Despite these protections, Dodd-Frank doesn’t eliminate all ARMs risks:

Rates are capped, not frozen. Caps limit how much rates can rise, but your 6% rate today can still legally jump to 11% — significantly increasing your monthly payment.

Economic downturns hit harder. During the Great Recession, foreclosures surged roughly 800% among prime borrowers, according to the Federal Reserve. When job loss meets rising mortgage payments, even "qualified" borrowers can fall behind.

Regulators still treat ARMs as high risk. Unlike fixed-rate mortgages, ARMs don’t qualify as “seasoned” loans – that is, mortgages that have proven their stability over time — under federal guidelines.

🔍 Read more: How to convert your ARM into a fixed-rate mortgage

How ARM rates work

ARMs follow a simple two-number pattern. The first number is your fixed-rate period — typically 3, 5, 7 or 10 years. The second number is how often your rate adjusts after that: annually, every six months and so on.

🏡 ARMs: How to decode the numbers

Type

Fixed period

Adjustment frequency

What this means

5/1 ARM

5 years

Once a year

Initial rate is locked for 5 years, then adjusts every year after that

7/6 ARM

7 years

Every 6 months

Initial rate is locked for 7 years, then adjusts every 6 months after that

10/1 ARM

10 years

Once a year

Initial rate is locked for 10 years, then adjusts every year after that

3/6 ARM

3 years

Every 6 months

Initial rate is locked for 3 years, then adjusts every 6 months after that

Let’s talk real numbers

The average rate on a 5/1 ARM is 5.98% as of January 6, 2026, compared to about 6.25% for a 30-year fixed mortgage. On a $400,000 loan, that's roughly $70 less per month.

But remember: It’s only guaranteed for the first five years. After that, all bets are off and it adjusts with the market. You’ll either need to absorb or refinance out of a rising rate — a process that can cost $3,000 to $6,000 at closing.

🔍 Read more: 6 ways to get the lowest rate on your next mortgage

The short list: When to consider an ARM

ARMs require extra caution in any market, yet with so much uncertainty, consider one only if:

You have a solid exit plan. If you’re planning to sell within five to seven years, an ARM’s lower initial rate can save you money. But if the housing market tanks or your job situation changes, you could find yourself stuck unable to sell or refinance.

You have a significant financial cushion. Only consider an ARM if you have enough savings to weather both a job loss and monthly payment increases of $300 to $500. If not, a rate adjustment could push you into foreclosure.

If a layoff would immediately threaten your ability to pay your mortgage, an ARM is too risky.

🔍 Read more: What I wish I knew before buying a house (that no realtor ever tells you)

🚩 4 red flags that mean walk walk

Skip ARMs entirely if:

You’re stretching to qualify. If the only way you can afford a house is with an ARM’s lower initial rate, you’re likely to face trouble when rates adjust.

Your income is unstable. Freelance work, side hustles, sector layoffs — unpredictability makes ARMs a danger.

You're buying your forever home. Upfront savings may not justify decades of uncertainty. Fixed payments mean fixed costs in retirement.

You don't understand the cap structure. If you can’t confidently explain the terms, rate changes and worst-case scenarios, don’t sign for an ARM.

Ask about prepayment penalties. While rare on standard ARMs today, some lenders charge fees if you refinance or sell within the first few years. Get confirmation in writing before closing.

🔍 Read more: Why ‘buy a house and get rich’ doesn't work anymore (unless you’re already wealthy)

Bottom line: The guardrails changed. The risk didn’t.

Today’s ARMs include safeguards that didn't exist before 2008. But those protections don't eliminate the core risk: ARMs transfer interest rate uncertainty from the bank to you.

An adjustable-rate mortgage can make sense if you're planning to sell or refinance within the fixed period and have enough savings to cover worst-case payment increases. But if you're choosing an ARM because it's the only one you can afford, it’s the wrong loan. Qualifying at today’s lowest rate doesn’t mean you can afford tomorrow’s adjusted rate. That’s the lesson of 2008.

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About the writer

Kat Aoki is a finance writer who's written thousands of articles to empower people to better understand technology, fintech, banking, lending and investments. Her expertise has been featured on sites like Lifewire and Finder, with bylines at top technology brands in the U.S. and Australia. Kat strives to help consumers and business owners make informed decisions and choose the right financial products for their needs.

Article edited by Kelly Suzan Waggoner

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Source: “AOL Money”