A risky mortgage instrument that helped spark the Great Financial Crisis is on the rise again. It’s a gamble on the Fed’s future direction

Adjustable-rate mortgages (ARMs), once the villain of the subprime meltdown, are surging in popularity as homebuyers look for savings in a high-rate era. The share of ARMs reached nearly 13% of all mortgage applications this fall, per the Mortgage Bankers Association, the highest level since 2008.

​For buyers today, the lure is clear: ARMs offer starting rates about a full percentage point lower than fixed-rate loans, making the difference between buying a home or staying sidelined. The typical 5/1 ARM has an interest rate in the mid-5% range, compared to the 30-year fixed rate’s 6.3% and above. On a $400,000 loan, that initial discount translates into $200 or more in monthly savings, enough to tip the scales for first-time buyers or those seeking a larger property.​

But every ARM, by definition, is a wager: after the initial fixed period—often five, seven, or 10 years—the interest rate resets, adjusting with the broader market. Today, that means buyers are betting the Federal Reserve will cut rates before their loan recalculates. If the Fed delivers on anticipated rate drops in December, customers could see payments shrink further or at least avoid big jumps when the adjustment arrives.

Back in the mid-2000s, adjustable-rate loans contributed to a financial calamity. Easy credit, teaser introductory rates, and lack of oversight meant millions of Americans took out loans with initially low payments, only to see costs soar when interest rates reset. ARMs then accounted for as much as 35% of mortgage originations, fueling both a housing bubble and the crash that followed. Fast-forward to 2025, and some are justifiably anxious at the product’s resurgence.​

Borrowers aren’t just gambling with their own fortunes, though. This time, banks and regulators have changed the rules. Today’s ARMs come with strict documentation standards, borrower protections, and built-in caps designed to prevent the shock resets that hammered millions of families in the last crisis. Lenders scrutinize income, debt, and credit quality, and loans are calibrated to ensure that, even if rates go up, buyers won’t be caught entirely off guard. Pre-crisis, some ARMs changed rates almost overnight, but most modern loans fix the initial rate for several years and limit increases through legal ceilings.

Risks this time around

Still, the instrument carries risk—especially if the Federal Reserve changes course. If rates rise unexpectedly, those low initial payments can balloon, exerting pressure on household budgets just as the broader economy absorbs the impact.

Unlike the pre-crisis era, buyers are appearing to use ARMs as financial tools for specific strategies, rather than gambling on ever-increasing home values. The trend centers on affordability: with 30-year fixed rates still elevated (averaging near 6.3%), ARMs offer an initial fixed period at rates nearly a full percentage point lower, sometimes saving hundreds per month. And the current vogue appears to reflect an educated guess—or a gamble, depending on your position—that interest rates, and therefore mortgage rates, will continue to decline in the near future.

Michael Pearson, senior VP of business development at A&D Mortgage, told Realtor.com earlier this month that “the common wisdom is that interest rates will continue to dip lower, slowly over the next couple of years. So although ARMs offer only short-term fixed interest rates, there may be more opportunities to lock into long-term lower rates in the coming years.” For many, this lower payment is seen as a bridge until rates drop, jobs relocate, or life changes; borrowers are actively planning to refinance, move, or pay off loans before the adjustable period kicks in.

In high-cost markets, the pressure to choose ARMs is strong. With fixed mortgage rates remaining stubbornly high after years of Fed rate hikes, buyers are willing to roll the dice on interest rates. Some see ARMs as the only path to homeownership, wagering that central bankers will cut rates as inflation cools off.​

The harsh reality is that prospective homeowners don’t have much of a choice. A recent Redfin analysis found that America hasn’t been this stuck in terms of housing mobility for at least 30 years, with just roughly 28 out of every 1,000 homes changing hands between January and September. “It’s not healthy for the economy that people are staying put,” said Daryl Fairweather, chief economist at Redfin. The so-called home sales turnover rate through the first nine months of this year is down about 30% from the average rate over the same time periods between 2012 and 2022. ​

Ultimately, the surge in ARM loans is both a sign of tight economic times and renewed risk-taking. While regulatory guardrails may prevent the kind of crash seen in 2008, the outcome for individual borrowers still depends on what the Fed does—and whether buyers truly understand the gamble they’re taking. For now, a controversial loan product is back in the spotlight, and the housing market is holding its breath for the next move from the central bank.

​For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.