Adjustable-Rate Mortgages As A Percentage Of Total Loans: So Low!

Since 2009, I have encouraged Financial Samurai readers to take out an adjustable-rate mortgage instead of a 30-year fixed-rate mortgage. The rationale was that we were in a downward interest rate channel, so why pay more in interest if you don't have to?

Further, the average homeownership tenure back in 2009 was only around 5-7 years. Therefore, it was illogical to take out a more expensive mortgage for a much longer fixed-rate duration. Today, the average homeownership tenure is 10+ years given the desire for real estate has boomed.

Because I practice what I preach, I've taken out multiple adjustable-rate mortgages (ARM) over the past 13 years. All told, I've saved over $500,000 in mortgage interest expenses. In fact, my existing primary residence mortgage is a 7/1 ARM at 2.125% taken out in 2020. Score!

However, while all this time I had thought I had been making a difference by helping people save money on their mortgage expenses, it turns out, my message had been ignored and fallen on deaf ears!

Adjustable-Rate Mortgages As A Percentage Of Total Mortgages

Take a look this great chart put together by Rick Palacios of JBREC. It shows that adjustable-rate mortgages as a percentage of total loans are only 4.7%! Holy heck! I would have guessed the percentage was closer to 25%.

In other words, the vast majority of mortgage borrowers have 30-year fixed-rate mortgages and to a lesser extent, 15-year fixed-rate mortgages, which I like.

Percentage of adjustable rate mortgage loans to total loans

But here's another data point regarding adjustable-rate mortgages as a percentage of total mortgages just a month later. Within a short period of time, the 10-year bond yield shot up to as high as 3.2%. The average 30-year fixed-rate mortgage shot up to 5.25%.

As a result, roughly 10% of all mortgages are now ARMs. Take a look at the big spike below as the mortgage market “reARMs” with mortgage rates up in 2022 and 2023.

Adjustable-Rate Mortgages As A Percentage Of Total Loans rises to 10% after an increase in mortgages rates in 2022

Why Did The Percentage Of Adjustable Loans Shrink So Much?

The percentage of adjustable-rate mortgages to total loans shrank from a high of roughly 34% in 2005 to a low of under 5% in 2022. The decline began when the housing market peaked around 2006 and bottomed in 2009 at around 2.5%.

Adjustable loans declined in popularity due to:

1) A big slowdown in demand for housing

2) Declining interest rates, resulting in lower 30-year fixed-rate mortgage rates

3) A decline in housing prices, making homes more affordable with fixed-rate mortgages

4) A reduction in mortgage lending and interest rate risk by banks

5) An emphasis by mortgage lenders, pundits, and advisors to take out a 30-year fixed-rate mortgage

6) The desire for predictability and comfort due after suffering real estate losses

Not Trying To Be Contrarian With Mortgages

I haven't been recommending readers take out an ARM to buy a home to be a contrarian or get attention. My #1 goal has always been to help you save more money and make more money. The more you save and make, the more you can do what you want.

Since 2009, taking out an ARM has been the absolute correct call. If you took out an ARM, you paid at least a 1% lower rate on average than if you took out a 30-year fixed-rate mortgage. On an average $300,000 mortgage, that's $3,000 a year in gross annual interest savings or $30,000 in savings after 10 years.

Further, before your ARM reset, you most likely could have refinanced your ARM to another ARM for the same or lower rate, at little-to-no cost. Or, you could have let your ARM's introductory fixed-rate period expire. If so, your new rate would have likely stayed the same or gone down.

I used the $300,000+ in mortgage interest savings since 2009 to invest in stocks and real estate. From those investments, I've been able to boost my passive income by ~$30,000.

Mortgage Rates Are In A Downward trend

Below is the 40-year downward trend of the 10-year U.S. Treasury bond yield. Sure, mortgage rates temporarily higher with elevates inflation. But do you really want to bet against a long-term structure trend? I don’t.

I’m confident by the time your 5/1 ARM adjusts in 2027, mortgage rates will revert back to its downward trend. In other words, I don't think it was a mistake to take out an ARM in 2020. This was two years before mortgage rates and interest rates started going up.

10-year US Treasury bond yield in downward trend since the mid-1980s

ARM Or 30-Year Fixed In A Rising Interest Rate Environment?

So what should homeowners or prospective homeowners do now that we're in a Fed-rate-hike cycle? The most rational answer is to match the duration you plan to own your home or pay off your home with the fixed duration of the mortgage loan.

In other words, if you plan to own your home or pay off your mortgage in 10 years, get a 10/1 ARM. If you plan to take 28 years to pay off your home, perhaps getting a 30-year fixed-rate mortgage is more appropriate.

That said, I still recommend an ARM over a 30-year fixed rate mortgage, even if you plan to own the home or take longer to pay it off.

Here is the main reason to get an adjustable-rate mortgage:

Mortgage rates may go up during your ARM's fixed-rate duration. But chances are high mortgage rates will head back down before your ARM resets. The most common types of ARMs are 5/1, 7/1, and 10/1 followed by 3/1. The longer the introductory period of your ARM, the greater the chance mortgage rates will head back down for the reset.

Even if mortgage rates are higher during the first year of a reset, you will have paid off some of your principal balance. As a result, a lower principal balance will help offset the higher interest rate. There is also a maximum interest rate hike the first year and maximum interest rate cap.

Further, you saved money during the entire duration of the introductory fixed-rate period, which provides a buffer for higher rates. Finally, in the future, you will mostly likely be making more money.

Of course, if you can get a 30-year fixed-rate mortgage that's lower than the rates you are seeing for ARMs, then getting the 30-year is a no brainer.

Take a look at the number of mortgages by various interest rates. Over 90% of mortgages today have interest rates below 5%. Therefore, a rise in interest rates won't negatively affect existing homeowners as much as you might think.

Mortgage Rate Comparison Example

Let's say I take out a $1 million 7/1 ARM that is at 3.5% versus a 30-year fixed-rate mortgage at 4.5%. In seven years, I will have saved $70,000 in gross mortgage interest.

If after the seventh year, my ARM resets to 4.5%, I'm paying the same interest rate if I had taken a 30-year fixed-rate mortgage, a decent possibility.

If my ARM rate resets by 2% to 5.5%, I have seven years at 5.5% before getting a 30-year would have started saving me money. A 2% increase is about the most I expect mortgage rates to increase.

However, the chances are greater than 80% that sometime during this 14-year time period before I start losing, I would have sold the property, seen mortgage rates go down again, or paid off the mortgage. In the 20% chance I still have the mortgage, the principal balance would likely be 30% lower.

Average homeownership tenure

A 30-Year Fixed Rate Mortgage Is Overrated

If you are a first-time homebuyer, do you really think the first home you buy will be your forever home? Of course not! You will likely make more money, start a family, or relocate for a job and buy a nicer home. Therefore, getting an ARM is better for newer homebuyers.

If you are a veteran homebuyer, do you think taking out a 30-year fixed-rate mortgage will give you more peace of mind? Probably not once you realize you are paying a higher interest rate than you need to. Given you are older, you're likely wealthier with a lot more financial alternatives. As a result, you can afford to save money on your mortgage.

Let's say mortgage rates continue to surge to the moon. My 2.125% 7/1 ARM looks like it will reset to 6% in the year 2027. What should I do?

I'll simply continue to pay my mortgage as usual until 2027 without any extra principal payments, especially given real mortgage rates are negative. Then I'll set aside reserves over the years to pay down some or all the principal balance before I have to pay 6%. There's no way you're going to get me to pay a 3X higher interest rate!

Despite mortgage rates increase after I took out my 7/1 ARM in 2020, I have no regrets. I'm confident that in 2027, mortgage rates will return to long-term trend.

The Percent Of Adjustable Rate Loans Should Go Higher

The percentage of adjustable-rate loans to total loans will likely increase because everybody is rational and wants to save money. With higher home prices and higher mortgage rates, more buyers will be trying to save by taking out ARMs. The popularity of 5/5 ARMs will likely increase as well.

I suspect the percentage of adjustable loans will rise to 20%+ over the next three years. And if all borrowers read Financial Samurai, I think the percentage would surge to 50%.

If you take out a 30-year fixed-rate mortgage after a big move up in rates, you're locking in higher rates for a long time. That's like admitting defeat. Instead, by getting an ARM, you lock in a mortgage rate for a shorter duration, pay a lower interest rate, and then get a chance to refinance at a lower rate in the future.

An adjustable-rate mortgage will likely save you money over a 30-year fixed-rate mortgage. And there's nothing I like more than saving money while investing in my favorite asset class.

Be More Surgical Investing In Real Estate

As mortgage rates increase, there should be more real estate investing opportunities. As a result, I think it's wise to look for deals now and dollar-cost average into funds that invest primarily in rental properties on low-cost areas of the country. .

You can do so by investing in my favorite real estate investing platform is Fundrise. With over $3.5 billion in assets under management and over 400,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10. 

Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations, higher yields, and strong demographic shifts, Fundrise investments are in the sweet spot of a positive long-term trend.

I've personally invested $810,000 in private real estate funds that invest in the heartland of America. It's been great to diversify my expensive San Francisco real estate holdings and earn more passive income.

About The Author

52 thoughts on “Adjustable-Rate Mortgages As A Percentage Of Total Loans: So Low!”

  1. Question on the Percent of Adjustable Loans graph: I think it’s showing loan issuance, not current total outstanding. Is that right?

    I’m curious to know what % of mortgage loans outstanding are fixed vs variable rate. Any help much appreciated. Thanks!

    1. Good question! Yes. But I have another graph right before it that shows the adjustable rate mortgage as a percent of total is about 5%. Expect that to go up. The correlation is tight.

      1. Thanks for the reply!

        >I have another graph right before it that shows the adjustable rate mortgage as a percent of total

        That’s the graph I’m referring to, the first one in the post. Seems like it must be showing issuance, not outstanding. I can’t imagine that outstanding could plummet that fast in a couple/few years 2006–09. ??

        Thanks again,


  2. We have a mixed 30 yr and 10/1 ARM to hedge the risk and from back when the spread was much narrower. But now for sure I am going with ARMS. Not getting the great rates everybody else is bragging about here (maybe some folks are paying points?). I wonder if the duration should be 5,7, or 10 yr arms? I think the bond market is supposed to show what traders think rates will be like going out to 1 years. I think they are suggesting rates will be down again in 2 yrs? Those bond traders are pretty smart, so I am leaning towards a 5/1 Arm with low points at around 4.5% for investment property. Any thoughts from folks here?

    1. For an investment property, that’s not bad but have you checked local credit unions for better 5 year ARM rates? One near me is at 2.75% on a 5/5 ARM and another is at 3.25%, 20% down required for rentals.

      1. Not bad at all after the rate ramp. The key really is to continue shopping around define the lender who has the marginal utility and marginal cost curve intersected at that moment.

  3. Very thought provoking read, Sam. Thanks. What I don’t see account for, is declining home value and increasing rates at the end of the term. While I personally have a hard time seeing that happening, anything is possible and I like to account for the Black Swan in any financial decision I make.

    1. Sure, anything can and will happen. But an arm holder has many options before the rate resets. And even if it resets, there is a cap on the initial reset and lifetime cap.

  4. I closed on a purchase in February with a 5/5 ARM at 1.875%. Margin is 2% and adjustment cap is 2%. Index is 5-year Treasury. Lifetime maximum rate is 6.875%. So the maximum interest rate from years 6-10 would be 3.875%. The other ARM I considered was a 5/1 with 2.5% margin and lifetime maximum rate of 7.875%. Index would have been the 1-year Treasury. Adjustment cap is also 2%.

    I’d like to think I made the better choice with the 5/5 vs. the 5/1. Maybe when the rate resets, the difference between the 5-year and 1-year yield would be less than 0.5%? What do you think?

    (The bank almost made a mistake at the closing table and almost gave me a 5/1 ARM with the 5/5 terms (2% margin on a 5/1 instead of 2.5%). That may have been a bank error in my favor!)

    1. I like the 5/5 ARM. But there is a missing component. What is the 5/5 ARM and 5/1 ARM initial interest rate for the first five years? and what were the cost differences? thx

      1. Initial rate for the 5 year ARMs was 1.875%. (Advertised rate was 2.125%, but they gave me a 0.25% discount because of good credit and high down-payment). They also said they keep the ARM in-house, so they have more flexibility.

      2. 5/5 and 5/1 ARM had the same origination charges. Difference is the index is 5-year and 1-year Treasury rate, respectively, the margin is 2% and 2.5%, respectively, and the lifetime maximum interest rate is 5% and 6% above the initial rate of 1.875%, respectively. Both had the same initial and subsequent adjustment caps of 2%.

        1. (And subsequent rates can’t be below the margin of 2% and 2.5%, respective). I think that covers it all.

          No wonder people choose fixed-rate mortgages! Much easier to understand.

  5. Hey Sam,

    I had been refinancing with 5 and 7 year arms, but last year I changed to a 30 year. At that time for some reason the 5, 7 and 10 were higher than a 30 year fixed. I don’t know why, but they were. I ended up with 2.375 for 30 year fixed zero points.

    1. 2.375% is a great rate for a 30-year. And if it was higher than what you could find at an ARM, then that is a NO BRAINER! Congrats! I should include that point in my article. thx

    2. I had the same experience when I was shopping for rates both in late 2019 and mid-2021. I thought it was really weird, but maybe some lenders were pricing in the likelihood that they thought rates would decrease, so they thought those loans would be less favorable. *shrug* In any event, glad it wasn’t just me that had that experience! :)

  6. I was just advising a friend who is trying to buy a home now to consider an ARM.

    Rates on the 30-year and 15-year have moved up considerably in the last few months, but the ARM has barely budged. The spread between the 30-year fixed and 5/1 ARM is now ~1.2%.

    The 15-year fixed is now 1/3rd of a percent higher than the 5/1 ARM. Just three months ago the 5/1 ARM is 1/3rd of a percent higher than the 15-year fixed!

    Anyone who needs to finance a home purchase today should ABSOLUTELY get an ARM. Could not agree more

  7. Very entertaining article, Sam. I was certainly surprised to read that ARMs are such a low total percentage of rates.
    However, we locked in our dream home in Oct 2020, at 2.5% 30 year fixed. Even though we were 45 with 3 kids nearing college, we went big (for us). 6400 sf on a near acre lot in a gated neighborhood.

    We used your 30/30/3 method, wrote a love letter to the elderly sellers about how excited we were to make their house our home, and ended up in a great place for a sale price 830k!

    Zillow has the home at about 1.1 mil just 18 months since purchase but I would not list for less than 1.2 if I had to sell. For us, the 30 year at 2.5 % made sense. Thank you for your site. I’m going to preorder your book for myself and my daughters this week.


    1. Wonderful! 2.5% for a 30-year fixed is awesome. Congrats on finding your forever home and living it up during this time.

      Got to love being able to enjoy a nice home and seeing it go up by 30% in 18 months.

      Thanks for preordering several hard cover copies of my book too. I think you and your daughters will love it. It looks to be doing well on Amazon so far.

      1. Sam,
        From your newsletter, there appears to be multiple channels to order your new book coming out. Is there a preferred site for you? Very thankful for all of your wisdom and I’ve been a long time follower of your site.


        1. Hi Jim, Amazon usually has the best prices and it also has a fun ranking system. Right now, the book is a number one new release for multiple categories. As a result, that may help attract more new buyers.

          Thanks for the support!


  8. This timely-article can’t possibly be April Fool’s joke, correct !? How about Interest-only ARM mortgage too :-)

    Currently – there aren’t whole lot of good mortgage options, given sudden large spike in the rates over the last few months – especially in the light of how LOW the rates have been until recently – for such a long time.

    ARM lenders are not giving much Lender-credits to offset closing costs – even if they do, the rate/APR is almost as worse as 30-year mortgage rate. To make the things worse – the home prices across the board have shot up, possibly with multiple-bids — now you are assuming payment based on: higher down-payment, some extra cash-out due to appraisals not coming as high as your purchase price, higher loan-balance, and worse yet higher interest rate going on mortgages. To make matters worse – your next year property Tax bill (and likely insurance too) will most likely based on your higher purchase price (to rub salt – your long-living neighbors tax-bill, and mortgage payments are going to be significantly lower). All in all, if you are purchasing home currently, with mortgage — you will be spending significant chunk of your monthly income towards mortgage (PITI) ..

    Like you mentioned Sam, if you are not saving nearly 1% on the rate (with minimal closing costs), an ARM in current environment not saving much (nor is it saving future high rate-risk)

  9. I have two mortgages on two properties and they are both ARMs. I was a big believer of the 30-year fix rate loans as a way to achieve peace of mind. However these posts have changed my thinking, although I still believe in the peace of mind concept.

    Sam, you are big believer in insurance to protect your loved ones but isn’t a fix rate the same? You would not gamble with insurance and risk not to have enough coverage. Why is it different here?

  10. Why take on interest rate risk with an ARM? Why not just take out a 15 year fixed. We did and locked in 1.625% fixed for 15 years.

      1. Not sure on 15 year rates since I always do ARMs amortized over 30 years. But Schwab had killer rates up until a few months ago. In July last year I did a refi w/ Schwab for a 5 year ARM at almost no cost at 2.125%. That was the rate for 70% LTV and for depositing 250k in assets to schwab. They let you pull the assets back as soon as the loan closes which is what I did. If I could have deposited 1MM to Schwab for 60 days the rate would have been 1.875%. If it had been 60% LTV they would have nocked off another 12.5% on the rate in any scenario. The whole thing was mindlessly easy, really good experience.

  11. Oh wow I had no idea the percentage of ARMs is that low. That’s really surprising to me. I can see how some people psychologically want a fixed rate for piece of mind that nothing will change, but I still wouldn’t expect the ratio to be as low as it is for ARMs.

  12. Just went through this decision as we are closing on our 3rd family home (and leaving behind a 3.125% mortgage :'( ). I actually brought up going with an ARM with my lender. If the interest rate spread between the 30 yr fixed and the ARM is big enough, I think it makes sense to consider the ARM. I was quoted a 4% 30 year fixed with 0 points. The 10/1 ARM was only 3.75% and did have some costs… don’t recall exactly how much but I think the payoff was 3 years or so.

    Since I think the most likely scenario is that we are back at lower rates in the next 3 or 4 years and will be able to refinance, we took the 30 year fixed. Between these two choices, I see the 30 year fixed as the more convex option… if rates drop in the next few years I will be happy as I can refinance to a lower rate; if rate go up then I will have the piece of mind knowing that I have a relatively low, fixed rate. If the spread between the two was more than .25%, however, I think I would have been more willing to take the added risk since I would have been compensated for it.

    We will also be moving up to the 24% tax bracket this year (plus 9.3% CA), so knowing the interest rate will be 2.67% after deductions I’m not too concerned with the 4% rate :)

    1. Yeah, a spread of only 0.25% makes the 30-year fixed relatively more attractive. The yield curve is relatively flat between 10-30 years nowadays.

      But if the costs to refinance was the same, I’d still take the 10/1 ARM that’s only 0.25% lower. 10 years is plenty of time to pay down a lot of extra principle.

      What was the 7/1 or 5/1 ARM quotes you were getting?

  13. ARMs are simply consumers taking interest rate risk away from banks and dropping it into their own laps. Let’s see how you feel in 2-3 years after the Fed hikes repeatedly and the 10-year Treasury Rate goes north of 6 or 7%. Welcome to a repeat of the 1970s, with the overly accommodative Fed super late to respond to spiraling inflation.

    1. Sure, feel free to bookmark this post and revisit 2-3 years from now. And I’ll happily bet you the 10-year Treasury bond yield won’t surpass 6% by March 31, 2024.

      With a 7/1 ARM, my rate stays the same for another 5.5 years until 2027. Nothing changes. And if it does reset higher in 2027, the most it can reset higher is by 2% to 4.125% the first year, with a 7.125% lifetime cap.

      I’m not sure most people realize there is a lifetime interest rate cap reset for ARMs. I should include this fact in my post.

      Related: The Anatomy of An ARM Rate Reset

      1. Challenge accepted! Not sure why so many think markets only go up and that there’s no way this 14-year interest rate party is ending. The parallels to the 1970s are ominous and the market and Fed have both been ignoring risks and waving off valuation metrics for far too long. I just hope the precipice we’re on is more 1974 than 1929. TBD…

          1. I got out of the market in ’06 and got back in when the DOW hit 8,000 on the way back up. What I was reading and hearing in ’08 – ’09 had me believing that the recovery would be W-shaped. I exited at around DOW 10,000 and made intermittent trades on the short side, thinking we would slide back. We didn’t. I then sat on the sidelines for quite a while, then got back in with stocks and options (mainly short puts) as we hit the depths of the COVID drop. ’20 was a great year for me, ’21 average. In February 2022, I created laddered SPX butterflies from 4.000 down to 2,300, expiring monthly through September, while continuing to maintain a portfolio of short puts that act as cash-secured – strikes are at prices where I would be a buyer. This has created a nicely hedged portfolio that will do OK if the market moves sideways or up, but will do very well if the market drops enough, which I’m expecting.

            I still have a W2 income, but I’m looking to hang up my hat in a few years.

        1. There is little to NOTHING about the current environment similar to the 1970s other than the stated inflation (the CPI is a lie). Remember, Uncle Sam is $30TT in debt (and counting), personal and municipal debt is at all time highs, the Fed has created the everything bubble in the bond market. YCC is coming, and the long end is already pricing in QE5.

  14. I took out a 7/1 ARM at 2.375%, 3/8 lender credit in October 2021 because of your guidance and my friends always look at me like I am crazy when I tell them I have an ARM. This is my 4th loan over the last 3 years as I kept chasing rates lower and the lenders kept paying me to take them out. I had previously always been a 30yr fixed guy but only do that for my rental properties now.

    1. Great rate! Nice credit.

      It’s funny… but given the data… it makes sense that 95% mortgage holders think people with ARMs are crazy.

      I really didn’t realize we were so much in the minority.

  15. Hello there:
    It’s a nice article.

    In addition, Could you also throw some light on tax saving strategies for double incline earners in high tax states such as NY, NJ and CA? How can double income earner same money and what type of investments and other strategies can they focus on? We are double income earners and the taxes are such a big bit that we barely think we are a middle class. How can we get out of that and build the nest egg?


  16. I hear you but over the past 2 years I’ve refi’d ARMS lower to fixed rate loans. My primary home to a 15yr at 2.6%, investment home to 30yr 3.5 and 3.75% and a commercial to 25yr at 3.8%.

  17. I agree with this. However, when I have priced out ARMs, they have been really expensive on the lender fee side. So much so that it has negates the advantages of going with an ARM. I do not know why they have been priced that way by lenders.

  18. “Adjustable loans declined in popularity due to:”

    You left out:

    7). People who got burned in 2008 from buying houses they could only afford by leveraging a variable rate mortgage.

    I met someone working in a grocery store during the bubble who had a “pick a payment” mortgage. I had no idea how that worked and neither did they.

    Leveraging can be as bad a thing in RE as it is in stocks.

  19. I have only used ARM mortgages since 2002 when we bought our first place. 20 years later I have a 7/1 ARM at 2% and capped at 7%. It will make my jumbo mortgage under the conforming limit in 2028 when it resets.

  20. I’m glad you brought this topic up again, so you can give me advice on what I should do, if anything (we’ve talked before).

    I purchased my current house in 2016 with a 3%, 5/1 ARM. When it reset the first time, it went down to 2.625%. When it reset the second time, starting tomorrow, it’s be back up to 3%. Since the formula is 2.25 + LIBOR, it would be much higher if now.

    I did look at refinances during the pandemic, but I couldn’t find one that was low cost, that would get me a better rate than what I had.

    I’ve gotten some good bonuses at work. Should I pay the loan off? I’d rather not, so I have the cash to buy in Florida (I’ve mentioned previously, I wish I had not sold my house in Florida in 2016 on a company relocation, and that was a 5/1 ARM 3% that I had purchased in 2014 also on company relocation). Or should I just hold tight, and ride with the interest rate ups and downs (and effect on the ARM)?

    I’m finishing my basement right now, but I have cash for that. What I don’t have is the ability to find the workers and that is frustrating.

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