Survey: 43% of ARM Borrowers Regret Their Decision

As fixed mortgage rates have risen sharply over the course of 2022, more homebuyers are ditching their traditional home loans for adjustable-rate mortgages. ARMs typically come with a lower initial interest rate, but that rate can change after a set period of time – making this loan product inherently more risky for borrowers.

To find out how this trend is impacting consumers, U.S. News ran a nationwide survey of 1,203 respondents between Dec. 14 and 20, 2022, through PureSpectrum. Only borrowers who have borrowed an adjustable-rate mortgage could participate.

We asked respondents a series of questions to find out why they chose an adjustable mortgage rate: what their top priorities were when borrowing a home loan, if they had any hesitations about borrowing an ARM, and whether they regretted their decision. Here’s what we found:

Today’s homebuyers are facing an affordability crisis as rising mortgage rates and stubbornly high home prices have sent monthly payments soaring. So it makes sense why buyers are turning to adjustable-rate mortgages, which typically start out with lower interest rates and monthly payments than traditional fixed-rate mortgages.

As it turns out, that’s exactly the relief that ARM borrowers in our survey were seeking. The No. 1 reason why borrowers chose an ARM was that they wanted a lower monthly mortgage payment, with 50% of respondents saying so. About a third (32%) of ARM borrowers agree that fixed interest rates are currently too high.

A concerning survey result is 37% of respondents believe interest rates will be lower when their rate adjusts. That’s a risky bet to take – while economists can do their best to predict mortgage rate trends in the short term, nobody knows for certain where interest rates are headed in the future.

When asked their top priority when choosing a home loan, 42% of ARM borrowers said it was the affordability of their monthly payments, followed by fastest loan payoff (22%), getting the lowest mortgage rate (19%) and most savings over the course of the loan (18%).

Today’s adjustable-rate mortgages are almost exclusively hybrid ARMs, which have a fixed rate for a number of years before an adjustment period when the rate can change. The most common loan term among our survey respondents was a 5/1 ARM, which has a fixed rate for five years and can adjust once per year after that. About one in four borrowers surveyed (26%) chose this ARM option.

The second-most popular term was the 5/6 ARM, with 22% of respondents with this loan type. Like the 5/1 ARM, the 5/6 option has a fixed interest rate for the first five years of the loan. But rather than a yearly rate adjustment, the rate can change every six months after the fixed-rate period ends.

Shorter-fixed-term ARMs, including the five- and three-year options, were more popular than loans with longer fixed periods like the 7/6 and 10/1 ARMs. Loans with a shorter fixed period typically come with lower mortgage rates than longer-fixed-term ARMs. For example, the average 5/1 ARM rate was 5.45% during the week of Dec. 22, compared to 5.99% for the 10/1 ARM.

Adjustable mortgage rates are also popular among jumbo loan borrowers who bought higher-priced homes. Jumbo ARMs are home loans that exceed the conforming loan limit, which was $647,200 for most parts of the country in 2022.

The share of jumbo loans among all conventional mortgages was about 30% at the end of 2021, according to a recent report from CoreLogic, a real estate analytics firm. But among ARM borrowers in our survey, they were even more prevalent: 44% of respondents borrowed a jumbo ARM, as opposed to the 56% who borrowed a conforming ARM.

Conventional advice dictates that ARMs can be a less risky option for borrowers who plan to sell their home or refinance to a fixed interest rate before their adjustment period. More than half (55%) of ARM borrowers in our survey planned on using this strategy, essentially using an ARM as a temporary tool to lock in lower rates and monthly payments during the fixed-rate period.

Still, a significant portion of ARM borrowers (45%) do not plan on selling or refinancing before their adjustment period. As already mentioned, many survey respondents believe that interest rates will be lower by the time their rate adjusts, but that’s difficult to predict.

While most ARM borrowers (68%) would be able to afford a higher monthly payment if they allow their rate to adjust, nearly a third of them would not. This may be a cause for alarm for these homeowners, since falling behind on payments can result in late fees and eventually foreclosure.

Adjustable-rate mortgages often have a less-favorable reputation when compared to traditional fixed-rate mortgages, even among those who chose an ARM. More than half (58%) of survey respondents had hesitations about ARMs before borrowing one themselves.

When asked if they had heard any negative statements about ARMs, borrowers were most likely to report hearing that ARMs were more risky than fixed-rate mortgages, at 47%. Survey respondents also reported hearing false or exaggerated statements about ARMs, such as that the rates can only adjust higher (35%) and that ARMs are responsible for the 2008 housing crisis (33%).

Additionally, 35% of ARM borrowers have heard that these loans have complicated rules and fee structures, which can be somewhat true. Although the exact terms are outlined in a borrower’s loan agreement, it’s important to discuss the details with a mortgage lender before taking out an ARM.

But ARM borrowers didn’t take their decision lightly. Most of them (72%) shopped around with multiple lenders to compare rates before applying for a mortgage. Of them, 52% evaluated three lenders while 26% shopped with two. A smaller portion compared four lenders (16%), while even less spoke with five or more (6%).

Even though 35% of survey respondents have heard that ARMs come with complex rules, some borrowers still struggle to understand the implications of these rules. About two in five (43%) regret choosing an ARM, many of whom are caught off guard by the “adjustable” part of adjustable-rate mortgage.

Among ARM borrowers who experienced regret, 44% said that their interest rate adjusted to a higher rate than they expected. About a third (36%) felt that it was taking too long to repay their mortgage, while the same amount were worried they wouldn’t be able to afford their monthly payment when their rate adjusts. Additionally, 22% regret their decision because they simply don’t understand their loan’s rate adjustment structure.

Despite the negative experiences shared by some borrowers, an ARM may be the right type of mortgage for the right homebuyer. If you’re considering taking out an ARM, be sure to ask your lender these questions first:

With a lower initial mortgage rate, an ARM can be an effective cost-cutting tool – especially if you plan on selling your home or refinancing to a fixed-rate loan before the rate changes. But if you’re not comfortable with the complexity and uncertainty of borrowing an ARM, a fixed-rate mortgage offers a more predictable alternative.