Surging mortgage rates have 1 in 10 home buyers choosing an adjustable-rate mortgage.

Adjustable-rate mortgages have the potential to save home buyers some money up front, but they also can present challenges down the line.

When Sean Burke and Alyse Stanley bought their first home in Rockford, Ill., in October 2023, the average 30-year mortgage rate had just crossed 8%.

The couple had moved to Illinois from Virginia in search of affordable housing. Homes in Rockford were selling for about half the price of houses in Virginia Beach, where they had been renting.

Seeking to keep their monthly costs around the same as the rent they paid in Virginia, they decided to take out an adjustable-rate mortgage, or ARM, with a 6.85% rate.

They saw the ARM as a necessary gamble, the couple told MarketWatch. Their rate would reset after three years, and then every five years thereafter. The loan structure was uncommon; most lenders offer ARMs with an initial five- or seven-year fixed period.

Three years later, the move has paid off: Mortgage rates remain high, but because their initial rate was so elevated, when the loan adjusted, the couple's mortgage payment dropped by $60. (However, their overall monthly housing costs have gone up, thanks to higher home-insurance bills.)

Related: More than 70% of recent home buyers were counting on mortgage rates to drop. Now they're stuck.

Today's house hunters are making calculations similar to the ones Burke and Stanley made in 2023. As bond yields surge and home buyers seek relief from rising mortgage rates, ARMs have made a comeback. At the same time, hundreds of thousands of existing ARMs are poised to reset - potentially at a higher rate than their introductory one, which could set those homeowners up for higher monthly payments.

More home buyers are looking at ARMs

During the subprime-mortgage crisis, some ARM borrowers buckled under balloon payments when the initial fixed term of the loan expired. To some, that history has given ARMs an unfavorable reputation.

Today's ARMs are more regulated, and federal limits now dictate how much the loan's rate can change. They still carry the risk of variability over the life of the loan, but lower introductory rates have made ARMs attractive for buyers struggling to afford fixed rates in today's housing market.

About 10.3% of home buyers who applied for a mortgage in the week ending Sept. 25 opted for an ARM, according to the Mortgage Bankers Association trade group. That was the highest share since October 2025.

The 30-year fixed-rate mortgage averaged nearly 7.3% as of Oct. 1, the highest level in roughly three years. The popular 5/1 ARM rate was 6.47%.

"We've had a lot more clients asking about [ARMs]," Chris Sbonek, CEO and president of Michigan-based mortgage lender Mitten Mortgage, told MarketWatch.

How many ARMs will reset in the coming year

In 2026, 64,000 ARMs have reset so far and another 84,000 are scheduled to exit their fixed term over the coming months, according to data provided exclusively to MarketWatch by Intercontinental Exchange (ICE).

In 2027, about 6% of all outstanding ARMs will reset to prevailing rates, per ICE. That means roughly 186,000 ARMs next year will exit the fixed introductory period.

Of the 186,000 ARMs expected to reset in 2027, 1 in 5 are jumbo loans, which are bigger mortgages that exceed the conforming-loan limits set by federal regulators. They're generally used to finance more expensive houses.

Jumbo-loan borrowers are likely to face the "largest shocks in 2027," ICE said, because their monthly payments could jump significantly if their loan resets at a higher rate. These wealthier borrowers may also be better able to absorb those shocks, the company noted, "though a smaller subset may need extra support as their rates and payments adjust upward."

The places with the highest share of ARMs are California, where 11.5% of outstanding home loans are ARMs; Washington, D.C. (10.7%); and New York state (10.5%), ICE noted.

Preparing for the ARM reset that's coming

Even homeowners with ARMs that aren't resetting anytime soon say they're anxious about how the loan will play out for them.

When Dylan Wagner bought his first home in Naperville, Ill., in 2022, a mortgage broker suggested he apply for an ARM instead of a fixed-rate loan because it would make his monthly payments more affordable.

The 34-year-old engineer ended up buying a three-bedroom home with a 10-year ARM at 3.875%. The ARM's lower up-front rate saved him about $500 a month - money that was critical at the time, as his then-wife was a stay-at-home mom. His mortgage payment is currently about $2,300 a month.

In hindsight, he says he wishes he hadn't been talked into an ARM. At the time, "I didn't even know what an ARM was," Wagner told MarketWatch. "I didn't even know what an amortization schedule was." But it was during the pandemic home-buying frenzy and he felt he was running out of time, so once the couple found a home they wanted, they acted fast.

The following year, Wagner got divorced and ended up with sole ownership of the home. He's since rented a room out to one of his best friends, who pays for about half of the mortgage and other housing expenses including utilities.

Wagner's ARM resets in 2032. He said he plans to put more money toward the principal to get his balance down before the rate resets. If mortgage rates stay at current levels, he's worried his monthly payment could potentially eat up 50% of his paycheck.