For many years, one of the best available mortgage options was the basic ARM — an adjustable-rate mortgage. Not the most popular, but in some ways attractive. One reason: luck.
Mortgage rates generally fell from 1981 through January 2021, dropping from 18.63% to just 2.65%. That four-decade decline eliminated the biggest risk of ARMs: the threat of sharply rising payments when the loan adjusts.
Because rates were largely trending down, ARM borrowers started with a rate below comparable fixed-rate financing — and then continued to benefit as interest levels fell further over time.
Nobody knew rates would gradually fall for 40 years, and now things have changed. Rates climbed from 2.65% in January 2021 to the upper-6% range by mid-2024 — raising an important question: How badly have recent ARM borrowers been hurt by rising rates, if at all?
2019 Mortgage Options: A Case Study
Going back to June 2019 — just before the pandemic — 30-year fixed-rate mortgages were available at 3.73% while 5/1 ARMs were priced at 3.39%, according to Freddie Mac. Most borrowers at the time would have gladly locked in 3.73% and avoided the uncertainty of an ARM. But some did choose the ARM, and we can now see how those loans played out as rates rose.
On a $300,000 fixed-rate mortgage at 3.73% over 30 years, the monthly principal and interest payment is $1,386 — and it stays there permanently, regardless of what happens to interest rates. That payment certainty makes fixed-rate mortgages a strong hedge against inflation.
A 5/1 ARM works differently. Here’s how:
- Start period: The rate is fixed for the first five years — 3.39% in this example. The initial monthly payment on a $300,000 mortgage is $1,329, saving $57 a month versus the fixed-rate option, or $3,420 over 60 months.
- Adjustment period: After the five-year start period, the rate adjusts annually. How much it can move is governed by the loan’s cap structure.
- Cap structure: A common arrangement is 2/2/5 — meaning the rate can increase by no more than 2% at the first adjustment, no more than 2% at each subsequent annual adjustment, and no more than 5% above the original start rate over the life of the loan.
- Index and margin: The adjusted rate is calculated by adding a fixed “margin” (set at origination) to a benchmark index such as the Constant Maturity Treasury (CMT) rate. For example, if the index is at 3% and the margin is 2%, the ARM rate becomes 5%. If the index drops to 2%, the rate becomes 4%.
In our example, if the rate increases the full 2% at the first reset, the new rate after five years is 5.39%. That rate applies not to the original $300,000 balance, but to the remaining balance of approximately $268,580 — with 25 years (300 months) left on the loan. The resulting monthly payment would be approximately $1,632, an increase of $303 per month, or about $3,636 per year.
For many households, $3,600 in additional annual costs is significant. But it’s worth noting that 5.39% is still well below the fixed rates that were available in mid-2024 — meaning even after adjustment, many 2019 ARM borrowers were paying less than buyers who locked in new financing at that time.
The DTI Factor
While an ARM wasn’t the obvious choice for most buyers in 2019, it offered a real advantage for those stretching to qualify. The lower initial monthly payment produces a lower debt-to-income ratio (DTI) — one more likely to meet lender requirements.
In other words, some buyers with marginal incomes may only have been able to qualify for a mortgage — and get into homeownership — because of the lower initial costs of an ARM. And broadly speaking, homeownership has proven to be financially beneficial: according to the Federal Reserve, owners had a median net worth of $396,200 in 2022, versus just $10,400 for renters.
Buying a home in 2019 turned out to be a strong financial decision for most purchasers. According to the National Association of Realtors (NAR), the typical existing home sold for $277,700 in May 2019 and approximately $419,000 by May 2024 — an equity gain of more than $140,000.
That said, rising home values are never guaranteed. Like stock prices, real estate values can go up or down — and not every market moves in the same direction at the same time.
Most 2019 ARMs: Where Things Stand Now
ARM start periods vary — and many are longer than five years. According to ICE Mortgage Technology’s ICE Mortgage Monitor, “77% of active ARM loans originated over the past five years operate as fixed-rate mortgages for at least the first five years, 63% are fixed for at least seven years, and more than a third are fixed for the first 10 years.”
That means many 2019 ARM borrowers were still paying their original rate well into the mid-2020s. Of the 1.75 million active ARM loans originated since 2019, ICE reported that only 328,000 had entered their adjustable phase at the time of that report, with 102,000 more expected to see their first reset within the following 12 months. See what you qualify for today at Refi.com.
Future Rates, Future Results
For many 2019 ARM borrowers — particularly those with 7- or 10-year start periods — rate resets are arriving now or on the near horizon. Where rates will land is impossible to predict, but historical context is useful: according to Freddie Mac, the average 30-year fixed mortgage rate between April 1971 and mid-2024 was 7.73%. Rates in the 3% range were the historical exception, not the norm.
Even so, most ARM borrowers are likely to be in a manageable position. Years of amortization mean a lower remaining balance — which helps contain monthly payment increases even if the rate rises. Many borrowers have also built substantial equity since 2019 and may have higher incomes today than when they originally qualified.
If your ARM is approaching a reset and you’d rather have the certainty of a fixed rate, refinancing could be worth exploring. Check today’s refinance rates at Refi.com and see whether locking in now makes sense for your situation.
