Homebuyers are using risky loans with the hope rates are going to eventually fall. Will the gamble be worth it?

Core Insights - The use of adjustable-rate mortgages (ARMs) has increased significantly, with around 10% of purchase-mortgage applications in early October 2025 being ARMs, the highest level since 2023 [1] - ARM loans accounted for 25% of mortgage applications for new home purchases last month, up from 16% a year ago, contributing to a rise in new home sales and average loan sizes [2] - The housing market has seen home prices increase by over 50% since 2019, prompting buyers to seek more affordable payment options, with ARMs being a popular choice [3] Industry Trends - ARMs typically offer lower initial interest rates for a fixed period of 3 to 10 years, making them attractive for buyers looking to manage monthly payments [4] - The average seven-year ARM interest rate is approximately 0.5 percentage points lower than that of a 30-year fixed mortgage, which is appealing to borrowers [5] - There is a growing trend among borrowers to seek rates in the 5% range to enhance affordability, with ARMs being one of the few options to achieve this [7] Risks and Considerations - After the initial fixed-rate period, ARMs reset based on current market rates, which can lead to significantly higher monthly payments if interest rates rise [4][6] - Borrowers face risks if they cannot refinance due to changes in their financial situation, such as job loss, which could lead to increased financial strain [6]