ARM borrowers may see a spike in their monthly payments at their first rate adjustment

Thousands of homeowners with adjustable-rate mortgages could face a spike in interest rates charged on their loans.

About 150,000 borrowers with ARMs are scheduled to see their first interest rate hike this year, with another 186,000 facing their first adjustment in 2027 and 155,000 in 2028, according to ICE Mortgage Technology, a mortgage data and technology company. Of this year’s total, ICE data provided to CNBC show about 64,000 are scheduled for their first adjustment between August and December.

Because rates have been rising since many borrowers took out the loan, their monthly payments may have increased by hundreds of dollars — and in some cases, by more than $1,000, according to ICE data. Meanwhile, a small portion could see their rates and monthly payments drop.

Unlike a fixed-rate mortgage, an ARM has an interest rate that can change over time. ARMs often start with lower introductory rates than fixed-rate loans, but after an initial period — often five, seven or 10 years — the rate begins to adjust. Once initiated, these resets typically occur every six months or a year and can raise or lower a homeowner’s monthly payment.

“Basically, when you take out that adjustable-rate mortgage, you’re getting a lower rate than the chance that rates could go up and you could be affected,” said Laurie Goodman, fellow and founder of the Center for Housing Finance Policy at the Urban Institute, a nonprofit think tank. “Well, unfortunately that’s the scenario that happened.”

There were an outstanding 3.1 million ARMs, the largest volume in 5.5 years, according to ICE. Most – 2.05 million – are still in the initial fixed period, and 1.05 million have matured in the manageable phase, ICE data shows.

ARMs make up just 5.6% of the approximately 55.4 million active mortgages in the US

How exactly the borrowers will see the adjusted rate depends on the opening rate. In addition, caps limit how much rates can go up or down. For example, a loan can have a limit of 2 percentage points on the first adjustment, a limit of 1 point for each subsequent adjustment and a maximum of 5 points over the life of the loan.

The average introductory rate on a so-called 5/1 ARM — where the introductory rate lasts for five years and then adjusts once a year after that — was about 6.65% as of Monday, according to Bankrate. ARMs accounted for 10.3% of mortgage applications in the week ending October 2, up from 5.9% in the week ending October 4, 2024, according to the Mortgage Bankers Association.

While the average introductory rate is lower than the average rate on a 30-year fixed-rate mortgage — 7.48% as of Friday, according to Mortgage News Daily — it’s higher than the introductory rate offered when many ARMs are first obtained.

For example, a seven-year ARM that starts in 2019 and faces its first reset this year from August to December has an average initial rate of 3% and an average unpaid balance of $548,000, ICE data show. Based on current rates and the cap on those ARMs, those borrowers face an average adjustment rate of 6.06% — which translates to an average increase in payments of $1,080, according to ICE.

By contrast, borrowers with a three-year ARM starting in 2023 had an initial average rate of 8.38% and a $136,000 unpaid balance, according to ICE. The rate is poised to drop to an average of 7.71%, reducing monthly payments by $124.

Lenders are required to notify borrowers between 210 and 240 days — seven to eight months — before the first payment at the adjusted rate, according to the Consumer Financial Protection Bureau. These notices show how your interest rate will change based on your current rate, but other notices arrive about 60 to 120 days before your scheduled payment, showing the new rate and actual monthly amount.

For borrowers with ARMs who want to stay in their home, the most common options are to stick with their current loan or refinance their mortgage.

“If you’re in a situation where your ARM adjustment will set you back financially, you may be better off reinvesting in the certainty of a fixed-rate loan even if the savings aren’t huge,” says Kate Wood, a credit expert with NerdWallet.

On the other hand, “if you have the financial ability to ride for a manageable period and you have enough appetite for risk, keeping an ARM is definitely an option,” says Wood.

Some borrowers stick with ARMs even as rates rise, said Duane Buziak, senior mortgage loan counselor with Coast2Coast Mortgage.

“Some people are good. They have money, they get raises, promotions, and they’re in better places,” Buziak said. “But no one else can say that.”

If you’re exploring refinancing, keep in mind that because refinancing means applying for another mortgage, you’ll face closing costs — money paid in settlement or rolled over to a new mortgage — that typically run 2% to 5% of the loan amount, according to Fannie Mae. On a $300,000 loan, that’s $6,000 to $15,000.

In addition, refinancing means improving your credit score and history.

“If you’re trying to get a lender to give you the lowest rate, you want to be a strong candidate,” Wood says.

If a homeowner is worried they won’t be able to make the new payments, they can contact a housing counselor with the Department of Housing and Urban Development, according to the CFPB. If you need to ask your lender for a loan modification or other repayment arrangement, a counselor can provide guidance on how to do so.

– CNBC’s Mike Winters contributed reporting.