Thousands of homeowners face adjustable-rate mortgage resets — and much higher payments

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Thousands of homeowners with adjustable-rate mortgages may soon face a potential spike in the interest rate that's applied to their loan.

About 150,000 borrowers with ARMs are scheduled to see their interest rates adjust for the first time this year, with another 186,000 facing their first adjustment in 2027 and 155,000 doing so in 2028, according to ICE Mortgage Technology, a mortgage data and technology company. Of this year's total, ICE data provided to CNBC shows about 64,000 were scheduled for their first adjustment between August and December.

Because rates have climbed since many of these borrowers took out their loans, their monthly payments may jump by hundreds of dollars — and in some cases, more than $1,000, according to ICE data. Meanwhile, a small share could see their rate and monthly payment go down.

Unlike a fixed-rate mortgage, an ARM has an interest rate that can change over time. ARMs often start with an introductory rate that's lower than on fixed-rate loans, but after an initial period — often five, seven or 10 years — the rate begins adjusting. Once they begin, those resets typically happen every six months or one year and can raise or lower the homeowner's monthly payment. 

"Basically, when you took out that adjustable-rate mortgage, you got a little bit lower rate in exchange for the possibility that rates could rise and you could be adversely affected," said Laurie Goodman, fellow and founder of the Housing Finance Policy Center at the Urban Institute, a nonprofit think tank. "Well, unfortunately that scenario happened."

There are 3.1 million outstanding ARMs, the largest volume in 5.5 years, according to ICE. Most of them — 2.05 million — are still in their initial fixed period, and 1.05 million have matured into their adjustable phase, ICE data shows.

ARMs make up just 5.6% of the roughly 55.4 million active mortgages in the U.S.

Exactly how much borrowers will see their rates adjust depends partly on their introductory rate. Additionally, caps limit how much the rate can rise or fall. For example, a loan might have a 2 percentage point limit at the first adjustment, a 1-point limit for each subsequent adjustment and a maximum 5 points over the life of the loan.

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The average initial rate on a so-called 5/1 ARM — one whose introductory rate lasts five years and then adjusts once a year thereafter — is about 6.65% as of Monday, according to Bankrate. ARMs accounted for 10.3% of mortgage applications in the week ended Oct. 2, up from 5.9% in the week ended Oct. 4, 2024, according to the Mortgage Bankers Association.

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

For example, seven-year ARMs that originated in 2019 and face their first reset this year from August through December have a median initial rate of 3% and a median unpaid balance of $548,000, ICE data shows. Based on current rates and the caps on these ARMs, those borrowers face a median adjusted rate of 6.06% — which translates into their payment jumping by a median $1,080, according to ICE.

By contrast, borrowers with three-year ARMs originated in 2023 have an initial median rate of 8.38% and an unpaid remaining balance of $136,000, according to ICE. Their rate is poised to drop to a median of 7.71%, reducing their monthly payment by $124.

Lenders are required to alert borrowers between 210 and 240 days — seven to eight months — before the first payment at the adjusted rate is due, according to the Consumer Financial Protection Bureau. That notice shows how your interest rate would change based on current rates, but another notice comes about 60 to 120 days before the adjusted payment, showing the actual new rate and monthly amount.

For borrowers with an ARM who want to remain in their home, the options generally are to stick with the current loan or refinance their mortgage.

"If you're in a situation where your ARM's adjustments would really stretch you financially, you might be better off refinancing for the certainty of a fixed-rate loan even if the savings wouldn't be substantial," said Kate Wood, lending expert with NerdWallet.

On the other hand, "if you're financially capable of riding out the adjustable period and you have enough of an appetite for risk, keeping the ARM is always an option," Wood said.

Some borrowers stick with their ARM even if their rate adjusts upward, said Duane Buziak, a senior mortgage loan advisor with Coast2Coast Mortgage.  

"Some people are fine. They have the money, they've gotten raises, promotions, and they're in a better place," Buziak said. "But other people can't say that."

If you do explore refinancing, be aware that because refinancing means applying for another mortgage, you'll face closing costs — money paid at the settlement or rolled into the 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.

Additionally, refinancing would mean making sure your credit score and history are in good shape.

"If you're trying to get a lender to offer you their lowest rate, you want to be as strong a candidate as possible," Wood said.

If homeowners are concerned they'll be unable to afford their 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, counselors can provide guidance on how to do that.

— CNBC's Mike Winters contributed reporting.