This means when mortgage rates increase, ARM holders can experience the shock of significantly higher monthly payments. For thousands of Americans who took out ARM loans five years ago, before interest rates soared to a four-decade high, that shock is occurring this year.

Elevated mortgage rates have exacerbated an already unaffordable housing market. Despite their drawbacks, ARMs have gained traction.

According to Intercontinental Exchange, a global technology and data provider, 1.7 million homeowners have bought homes with ARMs since 2019. Many buyers who opted for 5-year ARMs will face significantly higher monthly payments this year.

The fixed period for these ARMs has already reset for 328,000 homeowners, with 102,000 more resets expected over the next 12 months, according to ICE.

ARMs gained a bad reputation after the 2007-2008 subprime mortgage crisis when many homeowners could no longer afford their monthly payments once their rates reset.

While the rate of homebuyers choosing ARMs has not rebounded to pre-2008 levels, the share of homebuyers using ARMs has doubled over the past four years, according to the Mortgage Bankers Association.

Is an adjustable rate a good idea?

An ARM may be suitable for homebuyers comfortable with the risk of interest rate increases or those planning to move or refinance before the fixed rate expires. However, it is crucial to closely monitor the details to avoid difficulties. Most ARM loans have an interest rate cap to prevent costs from spiraling out of control.

Homebuyers increasingly believe that the Federal Reserve will cut interest rates in the next few years, giving them time to refinance their loans before the fixed period of their ARM expires. While the Fed doesn’t directly set mortgage rates, its actions influence them. This year, the Federal Reserve has indicated it may possibly cut its benchmark interest rate once from earlier in the year projections of five cuts. This remains to be seen.

What does this mean for investors? Will there be a chance to buy from distressed homeowners unable to refinance or afford their new payments? The answer is yes.

Home values have more than doubled in many states since 2019. Don’t believe us? Check out this article from Forbes “Housing Market Predictions For 2024” and scroll down to the interactive map – Typical U.S. Home Values by State – to see the average values from 2019 and today.

The crucial factor will be the sellers’ level of motivation, allowing investors to obtain this equity through the negotiation, purchase, renovation, and resale of the property. For wholesalers and house flippers, identifying and contacting these motivated sellers should be a top priority.