More homebuyers are opting into a risky type of mortgage in an attempt to save money

As mortgage rates rise, more borrowers are looking for ways to keep their homebuying costs down. Could an adjustable-rate mortgage be the way to do that?

On Wednesday, the Mortgage Bankers Association reported that for the week ending April 11, 2025, the share of borrowers applying for ARMs rose to its highest level since November 2023.

"Given the jump in rates, more borrowers are opting for the lower initial rates that come with an ARM, with initial fixed rates closer to 6% in our survey last week," Mike Fratantoni, MBA's SVP and chief economist, said in a press release.

MBA's data also showed that the average fixed 30-year mortgage rate increased 20 basis points to 6.81%. So it's possible that borrowers could get a significant discount by opting for an adjustable-rate loan. But is that a good idea?

Why more buyers are shifting to ARMs

"Generally, ARM rates are lower than fixed mortgage rates, however, how much lower depends on market conditions," says Jennifer Beeston, executive vice president of national sales at mortgage lender Rate.

Beeston says that ARMs have trended closer to fixed rates in recent years, but that they're starting to diverge more.

Because ARM rates are typically lower than fixed mortgage rates, they can help buyers find affordability when rates are high. With a lower ARM rate, you can get a smaller monthly payment or afford more house than you could with a fixed-rate loan.

How does an adjustable-rate mortgage work?

With a fixed-rate mortgage, your interest rate remains the same for the entire time you have the loan. This keeps your monthly payment the same for years.

As the name suggests, adjustable-rate mortgages work differently. You'll start off with the same rate for a few years, but after that, your rate can change periodically. This means that if average rates have gone up, your mortgage payment will increase. If they've gone down, your payment will decrease.

5/1 adjustable-rate mortgage example

The most popular type of ARM is the 5/1 ARM. We'll use it as an example to show how these types of mortgages work.

The first number tells you how long you'll keep the rate you were initially given. So, say you get a 5/1 ARM with a 6.20% interest rate.

For the first five years you have the mortgage, your rate will stay at 6.20%.

The second number tells you how often the rate will adjust after the initial fixed-rate period is over. With a 5/1 ARM, the rate adjusts once a year. If over those first five years market conditions cause interest rates to rise, you'll likely end up with a higher rate when it comes time to adjust.

Five-year ARMs also come in a 5/6 variation, which means that after the five-year fixed-rate period your rate will adjust once every six months.

Are adjustable-rate mortgages risky?

Because your monthly payment can go up over time, these types of mortgages are risky.

"Personally, I am not a huge fan of ARMs unless the borrower is educated on the risks and has a firm understanding," Beeston says.

ARMs do come with some limits on how much they can change each time they adjust. When you apply for an ARM, your lender will give you a loan estimate that spells out those limits and tells you how high your payments could ultimately go.

Don't assume you'll be able to refinance your way out of an ARM if your monthly payments go too high, Beeston warns.

"People always assume if that happens, they can refinance, but if rates overall are higher or if they do not qualify to refinance, they can end up in a bad financial position," she says.

Is an ARM better than a fixed-rate mortgage in 2025?

ARMs tend to be popular with borrowers who don't plan to stay in their homes for a long time. If you sell your house before the initial fixed-rate period is over, you won't have to deal with a changing mortgage payment.

If you plan to stay in your home for longer, Beeston recommends going with a classic 30-year fixed-rate mortgage.

"A 30-year fixed is fantastic for risk-averse borrowers," she says. "Not all countries have 30-year fixed loans. We are very lucky in America to have the ability to lock the rate of our loan for the life of the loan."

How much can an ARM save you right now?

How much you could save by opting for an ARM depends on your mortgage lender and your finances.

Say you get quotes from a lender that show you can get a 5/1 ARM with a 6.20% interest rate or a 30-year fixed-rate mortgage with a 6.80% interest rate on a $300,000 loan.

For the first five years, the monthly payment on the ARM (not including taxes and insurance) would be $1,837, while the monthly payment on the fixed-rate mortgage would be $1,955.

This is just an example. ARM rates can vary a lot, so if you're interested in seeing if an ARM could save you money, your best bet is to talk to a lender.

You can also keep an eye on Business Insider's daily mortgage rate coverage for the most up-to-date info on current ARM rates and how they compare to fixed-rate options.