While the majority of U.S. homeowners have opted for fixed-rate mortgages, there’s a growing trend toward adjustable-rate mortgages (ARMs).

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In 2024 and 2025, around 2.2 million Canadian homeowners will face rising interest rates, representing 45% of all outstanding mortgages in Canada. This impending “rate shock” is expected to have a substantial impact, especially since many of these borrowers secured their mortgages at historically low rates.

In contrast to homeowners in countries like the United Kingdom, Finland, Australia, Ireland, and Canada, a significant majority of U.S. homeowners enjoy fully fixed-rate mortgages. Only a small fraction of U.S. borrowers will need to refinance in the near future.

However, as mortgage rates have increased, a growing number of U.S. borrowers are gravitating towards ARMs. In 2021, ARMs made up just 4% of mortgage originations, but by May 2024, that percentage climbed to 15.5%.

To better understand the current mortgage landscape, ResiClub reached out to BatchService, a rapidly growing property intelligence and technology company. Their data scientists analyzed mortgages using a comprehensive database.

During the peak of the housing bubble, an astonishing 45% of U.S. mortgages issued in 2005 were ARMs. This situation was exacerbated by the fact that 80% of the subprime mortgages issued before the crash were also ARMs, many of which included those infamous “teaser rates.”

Regulatory changes aimed at curbing risky lending practices shifted the focus towards more stable mortgage products. By mid-2009, only 2% of U.S. mortgages issued were adjustable-rate.

According to BatchService’s analysis, we are now witnessing a resurgence of ARMs as buyers seek relief from the current challenges of housing affordability.

If inflation stabilizes and mortgage rates decrease in the coming years, most borrowers may avoid severe negative consequences from choosing an ARM. However, potential risks remain if the economic climate shifts.

It’s important to highlight that while BatchService observes an uptick in ARMs, the products available today are markedly different from those issued in the mid-2000s. Prior to 2008, lenders often approved ARMs based solely on borrowers’ capacity to manage the initial lower interest rates, with some not even verifying this for NINJA loans (“no income, no job, and no assets”). Today, borrowers with ARMs must qualify based on their ability to handle a higher monthly payment, not just the initial lower rate.

Currently, the most common ARMs are the 5/1 and 7/1 mortgages.