5 Adjustable-Rate Mortgage Myths Debunked
When it comes to home financing, adjustable-rate mortgages (ARMs) often get a bad rap. Many home buyers opt to not go with ARMs for myriad reasons. Perhaps they remember how the 2008 housing crisis impacted their families and friends. But things have changed in recent years. For the right buyers, ARMs can be a smart and strategic choice that can result in savings in the long term.
Together, let’s bust some of the most common myths about ARMs – and explain why they are worth considering when it comes to your next home loan.
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage is a home loan with an interest rate that changes over time. Typically, ARMs start with a fixed interest rate for a set period (often 5, 7, or 10 years) before adjusting annually based on a market index. For example, a 7/2 ARM has a fixed rate for the first seven years, then adjusts twice per year after that. At Peak, we offer a 7/6 ARM, which has a fixed rate the first seven years. After that, the rate can adjust every 6 months.
Want to learn more about adjustable-rate mortgages? Check out our previous blog article that explains ARMs more in depth.
Myth No. 1: “ARMs Are Risky and Unpredictable”
Reality: ARMs do carry some risk, but they’re not the financial minefield many believe them to be.
Modern ARMs come with rate caps that limit how much your interest rate can increase at each adjustment and over the life of the loan. These caps protect borrowers from extreme rate hikes. Plus, during the initial fixed-rate period, your payments are predictable—just like with a traditional fixed-rate mortgage.
If you plan to move or refinance before the fixed period ends, you may never even experience a rate adjustment.
Myth No. 2: "I’ll be Stuck if Interest Rates Soar”
Reality: While interest rates can rise, they can also fall. ARMs are designed to adjust with the market, not against you.
If rates go down, your monthly payment could actually decrease. And thanks to rate caps, there’s a ceiling on how high your rate can go. Lenders are required to disclose these limits upfront, so you’ll know the worst-case scenario ahead of time and before you sign any legally binding documents.
Myth No. 3: “Fixed-Rate Mortgages are Always Better”
Reality: Fixed-rate mortgages offer stability, but they’re not always the most cost-effective option, especially if you don’t plan to keep your home long-term.
ARMs typically offer lower initial interest rates than fixed-rate loans. That means lower monthly payments and potentially thousands in savings during the fixed period. For buyers who plan to sell, relocate, or refinance within 5 to 10 years, an ARM can be a financially savvy move.
Myth No. 4: “ARMs Are Only for Risk-Takers or Investors”
Reality: ARMs aren’t just for house flippers or real estate moguls. They’re a great fit for:
- First-time homebuyers looking to maximize affordability
- Military families or professionals who relocate frequently
- Young professionals expecting income growth
- Homeowners planning to refinance before the adjustment period
If you have a clear financial plan and understand how ARMs work, they can be a powerful tool — and not a gamble.
Myth No. 5: “ARMs Caused the 2008 Housing Crash”
Reality: The 2008 crisis was caused by a combination of factors, including predatory lending practices, subprime loans, and lack of regulation. Not ARMs themselves. Today’s ARMs are highly regulated, and lenders must verify a borrower’s ability to repay the loan, even after the rate adjusts. This makes ARMs much safer and more transparent than they were before 2008.
How to Determine if an ARM Could be a Good Fit for You
Not sure if going with an ARM is the right move for you? Ask yourself the following four questions:
- How long do I plan to stay in the home?
- Can I afford the maximum possible payment if rates rise?
- Am I comfortable with some level of uncertainty?
- Do I expect my income to increase over time?
If your answers align with the structure of an ARM, getting one might be a better fit than you think.
Tips for Choosing the Right ARM
If you decide that an ARM is an option you want to pursue, it’s important to choose one that is best suited for your financial situation and future goals. Here are some tips to make a more informed decision:
- Understand the terms. Know the fixed period, adjustment frequency, and rate caps.
- Compare indexes. ARMs are tied to different indexes (like Secured Overnight Financing Rate or the 1-Year Treasury). Some are more stable than others.
- Ask about margins. This is the percentage added to the index to determine your new rate.
- Run the numbers. Use mortgage calculators to model different scenarios.
- Work with a trusted lender. A good lender will walk you through the pros and cons based on your goals.
Final Thoughts
Adjustable-rate mortgages aren’t the villains they’re often made out to be. In fact, they can offer flexibility, lower upfront costs, and strategic advantages, especially in a high-interest-rate environment.
The key is education. By understanding how ARMs work and evaluating your financial goals, you can make a confident, informed decision. Don’t let outdated fears hold you back. With the right research, an ARM might be the smartest move you make on your path to home ownership.
Get a Mortgage Loan with Peak
At Peak Credit Union, we’re committed to helping you get into the home of your dreams. The home loan process can be complicated, but you’ll have someone to guide you every step of the way. Our team of home loan experts will work with you to find the best home loan situation for your needs, whether you want a fixed-rate or adjustable-rate loan. For more information, visit our home loans page.
Or apply for a loan today online, by calling (800) 258-3115, or visiting your local Peak branch.