One of the risky mortgage instruments that sparked the Great Financial Crisis is emerging, but this time there are three differences.
Adjustable-rate mortgages (ARMs) were once blamed for the subprime crisis, but they are becoming increasingly popular as homebuyers seek savings in an era of high interest rates. ARM’s share reaches Nearly 13% The number of all mortgage applications this fall was the highest since 2008, according to the Mortgage Bankers Association.
For today’s buyers, the temptation is obvious: ARMs offer starting rates about a percentage point lower than fixed-rate loans, making the difference between buying a home or waiting on the sidelines. Typical 5/1 ARM rates are around 5%, while 30-year fixed rates are 6.3% and above. For a loan of $400,000, the initial discount can translate into savings of $200 or more per month, enough to offer a first-time homebuyer or someone looking for a larger property.
But every ARM is, by definition, a bet: After an initial fixed period (usually five, seven or 10 years), the interest rate adjusts based on the broader market. Today, that means buyers are betting the Fed will cut interest rates before recalculating lending. If the Fed delivers its expected rate cut in December, customers may see further reductions in payments, or at least avoid a sharp increase when a correction comes.
Back in the mid-2000s, adjustable-rate loans caused a financial disaster. Easy credit, attractive introductory rates and a lack of regulation meant millions of Americans initially took out loans with lower payments, only to see costs soar when rates reset. Then ARM accounts for up to 35% The origination of mortgage loans fueled the housing bubble and subsequent collapse. Fast forward to 2025, and some people are justifiably anxious about the product’s resurgence.
Borrowers aren’t just gambling with their wealth, though. This time, banks and regulators changed the rules. Today’s ARMs come with strict documentation standards, borrower protections and built-in caps designed to prevent the kind of shock reset that devastated millions of households during the last crisis. Lenders carefully review income, debt and credit quality and make adjustments to loans to ensure buyers aren’t completely caught off guard even if interest rates rise. Pre-crisis, some ARMs changed rates almost overnight, but most modern loans fix the initial rate for several years and limit rate increases through statutory caps.
The risk this time
Still, there are risks to the tool — especially if the Fed changes course. If interest rates rise unexpectedly, lower initial payments could surge, putting pressure on household budgets as the wider economy absorbs the impact.
Unlike in the pre-crisis era, buyers appear to be using adjustable mortgages as a financial tool for specific strategies rather than betting on rising home values. This trend centers on affordability: With 30-year fixed rates still high (nearly 6.3% on average), ARMs offer initial fixed terms at rates that are almost a full percentage point lower, sometimes resulting in savings of hundreds of dollars per month. Current trends appear to reflect an educated guess — or a gamble, depending on where you stand — that interest rates, as well as mortgage rates, will continue to fall in the near future.
Michael Pearson, Senior Vice President, Business Development A&D Mortgage,Tell real estate agent network Earlier this month, “The general view is that interest rates will continue to fall slowly over the next few years. So while ARMs only offer short-term fixed rates, there may be more opportunities to lock in lower long-term rates in the coming years.” For many, a lower salary is seen as a bridge before interest rates drop, job moves or life changes; borrowers are actively planning to refinance, transfer or pay off their loans before the adjustment period begins.
In high-cost markets, there is a lot of pressure to choose ARM. After years of Federal Reserve rate hikes, fixed mortgage rates remain high, and buyers are willing to take a gamble on rates. Some see ARMs as the only way to obtain housing and are betting that central bankers will cut interest rates as inflation cools.
The harsh reality is that prospective homeowners don’t have many options. the latest one red fin analysis The U.S. hasn’t been in such trouble with housing mobility in at least 30 years, with only about 28 of every 1,000 homes changing hands between January and September, the study found. “It’s bad for the economy for people to stay put,” said Daryl Fairweather, chief economist at Redfin. The so-called home sales turnover rate in the first nine months of this year was about 30% lower than the average for the same period from 2012 to 2022.
Ultimately, the surge in ARM loans is both a sign of tight economic conditions and a resurgence of risk-taking behavior. While regulatory guardrails may prevent the kind of collapse that occurred in 2008, the outcome for individual borrowers still depends on the actions of the Fed and whether buyers truly understand the gamble they are taking. Now that a controversial loan product is back in the spotlight, the property market is holding its breath awaiting the central bank’s next move.
For this story, wealth Use generative artificial intelligence to help complete your first draft. Editors verified information for accuracy before publication.