Adjustable-Rate Mortgages Are Back as Fixed Rates Climb. Who Should Consider One in San Diego and Chicago

Adjustable-rate mortgages are back in the conversation. As fixed rates climb, more buyers are choosing adjustable loans for their lower upfront cost, according to Realtor.com, which looked at whether the savings are worth the risk. The timing makes sense. Mortgage Bankers Association data reported by HousingWire this week put the average 30-year fixed rate at 7.49%, and application volume fell again.

We don't see an ARM as a trick or a trap. It is a tool, and it fits some buyers far better than others.

Who an ARM can make sense for

Many of our luxury clients in San Diego and Chicago borrow above conforming loan limits, and jumbo lenders have long offered competitive adjustable products. Some buyers expect to sell, relocate, or refinance within the fixed period, which is often five, seven, or ten years. They may pay less in interest over the years they actually hold the loan. Military families in San Diego who move on orders fit that profile. So do executives on a set-term Chicago assignment and buyers planning a move-up within a few years.

ARMs can also suit buyers with uneven income, such as business owners and commission earners. They get a lower required payment now and can pay down principal when bonuses or distributions arrive.

Who should be careful

The risk is straightforward. When the fixed period ends, the rate resets to the market at that time, within the caps written into the loan. No one can promise rates will be lower then. Buyers planning to stay ten years or more in a long-term home in La Jolla or Lincoln Park, and buyers stretching to qualify, should test the payment at the highest possible adjustment, not just the starting rate.

Questions to ask a lender

• How long is the initial fixed period, and what index sets the rate afterward?
• What are the initial, periodic, and lifetime caps?
• What would my payment be at the lifetime cap?
• Is there a prepayment penalty?

For sellers

Higher fixed rates shrink the pool of buyers who can comfortably qualify at a given price. When buyers can use adjustable financing, they get back some of that purchasing power. Sellers tend to see more serious offers when they price for today's financing conditions and stay open to helping with a rate buydown.

Our team works with trusted local lenders in both markets. We can help you compare a fixed loan against an adjustable one before you write an offer. Choose the loan after you have a clear plan for how long you will own the home.