Last year, Jennifer Hernandez was shocked to receive notice that the monthly mortgage payments on her Houston home would increase by approximately $2,000. In 2016, Hernandez had refinanced her home loan using an adjustable-rate mortgage (ARM), which initially offers a low introductory rate for a fixed period.

Unlike the more common fixed-rate mortgages, ARMs provide temporary relief to homebuyers who wish to avoid higher initial mortgage rates, but they also carry risks. After the initial fixed period—typically five, seven, or ten years—the interest rate on an ARM adjusts periodically based on current market conditions.

Therefore, when mortgage rates rise, many ARM holders, including Hernandez, face the unpleasant surprise of significantly higher monthly payments. For thousands of Americans who obtained ARM loans five years ago, before interest rates surged to their highest levels in four decades, this scenario is unfolding this year.

Persistently elevated mortgage rates have exacerbated one of the most unaffordable housing markets in decades, prompting increased interest in ARMs despite their disadvantages.

According to Intercontinental Exchange data, 1.7 million homeowners have opted for adjustable-rate mortgages since 2019. Many of those who selected 5-year ARMs, a popular option, are now transitioning to substantially higher monthly payments.

The fixed-rate period for 328,000 of these ARMs has already reset, with another 102,000 loans set to reset within the next year, as reported by ICE.

ARM loans gained a tarnished reputation following the subprime mortgage crisis of 2007-2008, when many homeowners could no longer afford their monthly payments after their rates reset.

According to the Mortgage Bankers Association, although the rate of homebuyers opting for adjustable-rate mortgages (ARMs) never returned to pre-2008 levels, the percentage of homebuyers choosing ARM loans has doubled over the past four years.

Is choosing an adjustable rate a good idea?

An ARM might be suitable for homebuyers who are comfortable with the risk of potential interest rate increases or those who plan to relocate or refinance before the fixed rate expires, Lorriane Jones, a loan consultant in Southern California, told CNN.

However, when selecting an ARM, it is crucial to carefully monitor the details, as complications can arise quickly.

Hernandez, herself a loan officer, had mistakenly recalled the terms of her $1.1 million loan: instead of a 10/1 ARM, which maintains a fixed rate for the initial ten years and adjusts annually thereafter, Hernandez had taken out a 7/1 loan.

“I was completely caught off guard,” she said. “Life gets busy, and you can lose track. I’ve been juggling kids and work for the past seven years.”

Last October, Hernandez’s mortgage rate surged by 2% to 5.125%, the maximum permitted during the first adjustment year under her loan terms.

Most ARM loans include an interest rate cap to prevent costs from escalating uncontrollably. Hernandez stated her ARM is capped at 8.125%, which is five percentage points higher than her initial fixed rate.

Currently, refinancing her loan seems impractical since the 30-year fixed mortgage rate exceeds her newly adjusted rate. However, Hernandez anticipates her monthly payments will increase this coming October.

“I’ve managed so far, but now I’ll need to figure out how to manage it again this October,” she remarked. “It’s stressful to have this hanging over me.”

Andrew Marquis, a loan officer based in Lexington, Massachusetts, noted a significant rise in applications for ARM loans recently. He observed that more homebuyers are anticipating potential interest rate cuts by the Federal Reserve in the coming years, which they hope will allow them to refinance their loans before the fixed period of their ARMs expires. While the Federal Reserve does not directly set mortgage rates, its policies do influence them. This year, there have been indications from the Federal Reserve suggesting a possible single cut to its benchmark interest rate.

“On the jumbo loans we handle, I’d say about 40% of them are ARMs,” Marquis stated, referring to loans exceeding $766,000.

Marquis suggested that opting for an ARM loan might be beneficial for those comfortable with higher risk levels.

“If borrowers can secure a half-percent savings with a seven-year ARM compared to a 30-year fixed, they could save hundreds of dollars each month,” he explained.

Interest rates are unpredictable. Jennifer Hernandez mentioned that she benefited from savings during the initial seven years of her loan, but in hindsight, she would probably not have chosen an adjustable-rate mortgage back in 2016.

“These payment increases have been tough,” she said. “I’m just hoping that by the time my October adjustment comes around, rates will have dropped a bit.”