As mortgage rates rise, more borrowers are turning to adjustable-rate loans

As mortgage rates approach 8%, more buyers are turning to adjustable-rate mortgages to save on interest.

Nearly 11% of mortgage borrowers who locked in a rate in mid-September opted for an ARM, according to ICE Mortgage Technology data. The share is up more than three percentage points over the past three months to the highest in nearly four years.

ARMs can offer meaningful rate savings over a 30-year fixed-rate loan, but there's a catch: Instead of locking in one rate for the entire 30-year term, borrowers commit to an initial, often lower rate for a shorter period, typically five or seven years. After the initial term is up, their rate adjusts based on market conditions once or twice a year.

In the chart above, "rate lock activity" refers to borrowers locking in a rate after applying for a mortgage. Refinancings are leading the trend, likely driven by owners who took out a fixed-rate loan above 7% and those needing to cash out some of their equity.

Many borrowers think the rate gamble is worth i t : While the average 30-year fixed-rate mortgage is around 7.63% on Wednesday, a 7/6 ARM — which carries a fixed term for seven years and then adjusts every six months — is 6.95%, according to Mortgage News Daily. Many borrowers who seek out ARMs intend to sell their home before their initial fixed-rate term expires. Others are effectively betting that rates will be lower in the future, allowing them to refinance.

Most borrowers who took out ARMs in 2022 and 2023, when rates first started moving higher, remain in their initial fixed-rate period, meaning the Fed's recent tightening hasn't affected their rates. While 30-year fixed mortgage rates aren't directly influenced by the Fed, ARMs in their adjustment rates are much more sensitive to the central bank's interest rate decisions.

Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages, and home insurance.