BOSTON — Millions of American homeowners who opted for adjustable-rate mortgages (ARMs) during the early 2020s are now facing financial strain as interest rates reset higher, according to a new report by PYMNTS Intelligence, which suggests a “hidden” inflationary factor is lurking.
Initially appealing for their low introductory “teaser” rates, ARMs allowed borrowers to afford larger homes or lower payments when rates began climbing in 2022, PYMNTS Intelligence noted.
“But as those fixed-rate periods expire, borrowers are now confronting significantly higher monthly payments — sometimes hundreds of dollars more — which are straining budgets and forcing spending cutbacks,” the company said in releasing its analysis.
Example Shared
PYMNTS Intelligence shared this example: A typical five-year ARM taken at 2.91% in 2020 is now adjusting based on the Secured Overnight Financing Rate (SOFR), which sits at 4.39%.
“That’s pushing monthly payments on a $400,000 loan from $1,667 to $2,001 — an increase of $334, not including taxes or insurance,” the company stated. “Some 3/1 ARM holders face even steeper hikes, and many borrowers now lack affordable refinancing options, with 30-year fixed rates averaging 6.72% in late July.”
PYMNTS said it found that nearly four in 10 ARM holders have delayed or canceled a major purchase, and 42% have reduced non-essential spending — both higher than fixed-rate borrowers. Almost half (46%) now rely on credit cards for basic expenses.
Financial Squeeze
The financial squeeze from ARMs is arriving just as tariffs and broader inflation concerns begin to impact consumer prices again, compounding pressure on household budgets,” according to PYMNTs. “Mortgage payments already account for around 30% of income on average, leaving less for discretionary or emergency spending.”
The analysis noted that while ARMs make up only about 8% of all residential loans — approximately four million out of 51 million — they surged in popularity during 2022 as fixed-rate mortgages became more expensive.
“According to the Urban Institute, ARMs helped open homeownership to more people amid surging home prices, especially younger, higher-income buyers,” PYMNTS Intelligence stated. “Still, many are now seeing their discretionary spending evaporate.
The Real Inflation Risk
The real inflation risk, PYMNTS Intelligence warned, may not be at the gas pump or grocery store — it’s hidden in mortgage payments that haven’t reset yet.
