Americans Turn To Riskier Mortgages As Borrowing Costs Explode. Sound Familiar?

Americans are increasingly turning to adjustable-rate mortgages to escape borrowing costs above 7%, reviving a type of home loan that played a prominent role in the housing collapse preceding the 2007-2009 financial crisis.

Adjustable-rate mortgages, or ARMs, accounted for 9.8% of mortgage applications during the week ending Sept. 18 as the average 30-year fixed mortgage rate surged to 7.12%, its highest level since May 2024, according to the Mortgage Bankers Association. The shift was notable because borrowers were accepting the risk of future rate increases for relatively modest savings compared with a traditional fixed-rate mortgage.

Rates illustrated the tradeoff. The average 30-year fixed mortgage stood at roughly 7.22% Monday, compared with about 6.52% for a five-year adjustable-rate mortgage, according to Bankrate, a difference of roughly seven-tenths of a percentage point.

The Mortgage Bankers Association similarly found borrowers increasingly choosing ARMs as fixed rates climbed, with Chief Economist Mike Fratantoni saying borrowers were seeking adjustable loans because rates on five-year ARMs were more than one percentage point below fixed mortgages.

Adjustable-rate mortgages typically carry a fixed introductory rate before resetting based on prevailing interest-rate benchmarks, meaning borrowers can face higher monthly payments when rates rise.

Adjustable-rate mortgages, particularly loans made to subprime borrowers under weaker lending standards, were at the center of mounting mortgage distress before the financial crisis. In 2007, serious delinquency rates on subprime adjustable-rate mortgages climbed to nearly 16%, according to the Federal Reserve, as borrowers struggled with deteriorating housing prices and approaching interest-rate resets.

The subsequent losses spread well beyond homeowners. Mortgages were bundled into mortgage-backed securities and other structured products held across the financial system, and mounting defaults caused investors to question the value of those securities. The Federal Reserve later said deterioration in subprime mortgages, particularly adjustable-rate loans, helped expose weaknesses throughout financial markets.

Today’s mortgage market differs from the one preceding the financial crisis, particularly because lending standards have tightened and the current increase in ARMs was not concentrated in the same kinds of poorly underwritten subprime loans.

Still, borrowers choosing an ARM are making a similar fundamental trade: accepting uncertainty about future payments in exchange for a lower mortgage rate today.