40% of Americans Say They Would Get An Adjustable-Rate Mortgage

• 32.7% of people listed monthly costs as their top priority when choosing a loan type.
• Realists were 43.8% more likely to hesitate to get an ARM than optimists due to the potential for higher interest rates.

In September 2022, adjustable-rate mortgages (ARMs) made up around 9% of all new home loan applications to lenders, according to the Mortgage Bankers Association (MBA). Although this percentage shows a slight decrease in ARM applications since the last report in July, Google trends have shown an increase in searches for adjustable-rate mortgages as interest rates have risen over the last several months, with searches for this term peaking in the month of June.

With interest rates unlikely to drop anytime soon and home prices still higher, adjustable-rate mortgages offer another option for prospective home buyers to explore in this housing market.

In a new survey by Rocket Mortgage®, over 2,000 Americans were presented with the vague concept of an ARM – a mortgage with a lower introductory interest rate that begins to adjust with the market after a set period of time. 43.1% of people said they would be interested in the concept and 30.3% said they were unsure.

Of those who are currently in the market for a home, 65.4% of first-time home buyers and 62.9% of experienced home buyers said they would consider getting a mortgage with an adjustable rate. Comparably, only 37.8% of current homeowners who are not actively searching for a house said they would be open to considering this option. But how familiar are these borrowers with this type of financing and how does it impact their willingness to get an ARM?

Almost Half Of First-Time Home Buyers Don’t Understand Adjustable-Rate Mortgages

Although more than a third of Americans said they would consider getting an adjustable-rate mortgage, these same groups showed signs that they lack a clear understanding of what the loan option truly entails. This includes a lack of understanding of both the potential benefits and drawbacks.

When presented with a list, 38.3% of all respondents were unable to correctly identify the definition of an ARM. This number was higher when looking specifically at first-time home buyers, 48.6% of whom could not identify the correct definition. Comparably, over half (52.6%) of repeat home buyers could not identify it.

Despite a low level of awareness among those who are actively searching for a home, 68.4% of current homeowners and 73.3% of previous homeowners were able to correctly identify the definition of an ARM. This may point to the fact that experienced homeowners are more familiar with their loan financing options than prospective buyers.

The lack of knowledge surrounding ARMs is further evidenced by the specific pros and cons Americans associate with adjustable rates. When asked why someone might hesitate to get an ARM, 38% of people listed the potential for higher monthly interest rates and 33.5% listed the potential to pay more over the lifetime of the loan. Both of these are accurate assessments, because with an adjustable-rate mortgage, interest rates will increase or decrease with market shifts overtime.

However, 28.2% of people indicated they might hesitate to get an ARM when market interest rates are high and another 17.5% said they’d hesitate if they only planned to stay in their home a brief time. These responses indicate a lack of understanding, as each of these situations could actually present a strong case to consider an ARM.

As previously discussed, adjustable-rate mortgages begin with a fixed rate for a set period of time, after which the rate begins to adjust annually or semi-annually to match market interest rates. Because of this, ARMs typically begin with lower interest rates than fixed-rate mortgages during the introductory period. Therefore, if you’re buying a house during a time when market rates are high, getting an ARM may be more appealing due to the lower upfront cost. And as far as expected time in the home is concerned, the idea of only living in the home for a short time also presents a case for an ARM. That’s because home buyers who are planning to resell the property before reaching the end of the introductory period won’t need to worry about their rate potentially going up.

Another 15.7% of people said hesitation could be because ARMs are more difficult to obtain. However, in reality, ARMs can actually be easier to qualify for than fixed-rate mortgages due to lower debt-to-income (DTI) requirements. Respondents also failed to demonstrate an understanding of adjustable and fixed rates as they relate to the various types of mortgages. Provided with a list of loan types, including conventional loans, FHA loans, VA loans and Jumbo loans, survey respondents were asked to identify which loan types were available in an ARM. The correct answer is all of the above, as adjustable rates are a condition to a loan, not a loan type in and of itself. But although 63.3% of people selected at least one of the correct mortgage types, 23% selected none of the above.

Realists and Optimists Don’t Agree On Adjustable-Rate Mortgages

So, who is the perfect candidate for an adjustable-rate mortgage? On paper, borrowers who plan to pay more upfront for their loan or live in their home for only a short amount of time present a good case for an ARM, as each of these situations would allow the borrower to reap the benefits of the lower introductory interest rate without paying for it later. Of course, high interest rate markets also prompt prospective home buyers to consider ARMs.

But, interestingly, home buyer mindsets and shopping tendencies also seem to play a key role in whether or not they would consider getting an ARM. When asked to describe themselves, 52% of respondents called themselves realists, being more likely to choose predictability in their financial lives. Meanwhile, 41% called themselves optimists, being more willing to choose risk and trust themselves in making financial decisions. Only 7% of respondents identified as pessimists, though this could be because the line between pessimism and realism is often blurred in consumers.

When looking at how these self-identified mindsets impact home buyer behavior, realists were 43.8% more likely to hesitate to get an ARM than optimists due to the potential for higher interest rates and 37.7% more likely to hesitate due to the potential to pay more over the life of the loan.

Before details on adjustable-rate mortgages were shared, realists indicated they were more likely to consider an ARM with a 66.1% positive response, compared to only 57.3% of optimists. But after further details on ARMs were provided, these numbers shifted, with 44% of optimists and only 36.3% of realists saying they would consider getting an adjustable rate on their home.

This may indicate that while optimists are focused only on the various upsides of an ARM, realists consider both the potential advantages and drawbacks. But to really determine whether an ARM makes sense, these borrowers must first understand how these loans actually function.

First-Time Home Buyers Are More Interested In 5-Year Fixed Interest Rates

When thinking about adjustable-rate mortgages, there are two big factors to consider: the fixed introductory period and the adjustment period. During the introductory period, the interest rate on the loan is fixed. This period typically lasts for 5, 7 or 10 years. After the introductory period ends, the adjustment period begins – but how often the rate adjusts during this period depends on the specific loan terms. Most often, the rate will adjust once per year or once every 6 months.

When asked about their preferred introductory period, 42.1% of first-time home buyers said they would be interested in a 5-year fixed interest rate, compared to 42.3% of experienced home buyers and 33% of renters. But current homeowners expressed significantly less interest in the 5-year introductory period, instead leaning toward a longer 10-year period. This may be due to their firsthand understanding of what it means to make monthly mortgage payments. Overall, only 18.7% of respondents said they would be comfortable with their rate adjusting every 6 months, while 35% said they would be more comfortable with the rate adjusting only once per year.

But at the end of the day, whether an adjustable-rate mortgage makes sense depends on both the specific financial situation and the top priorities of the home buyer. What do they value the most: the monthly cost or the overall cost of the home? What do they prioritize: lower starting interest rates or reliable, fixed mortgage payments?

When asked, 32.7% of people listed monthly costs as their top priority when choosing a loan type, while 31.1% said they care most about the overall cost of the mortgage. Although these individuals put stock in both the short- and the long-term costs of buying a house, it would seem that predictability ultimately wins out. 21.1% of people saying they value having the regular, predictable monthly payments associated with fixed-interest rates more than they value the opportunity for a lower starting rate.

At the conclusion of the survey, more details were shared regarding ARMs and respondents were once again asked if they would consider it as a serious option when buying a house. At this point, 39.9% of respondents said yes, while 27.5% said no and 32.4% said they were still undecided.

So, what does all of this mean for prospective home buyers? Whether they see adjusting rates as a powerful tool or not, adjustable-rate mortgages offer up a potential solution for buying a home with rising rates.

Methodology

To better understand consumer perceptions and awareness of adjustable-rate mortgages, Rocket Mortgage surveyed 2,184 Americans with an equal number of Gen Z (18-25), millennials (26-41), Gen X (42-57), and baby boomers (58-65+) represented. Respondents were surveyed on current understanding, views and opinions on adjustable-rate mortgages both before and after receiving the definition of an adjustable-rate mortgage. This survey was conducted in August 2022.