Realtor.com® found the average percentage down payment in the 50 largest U.S. metro areas.
Adobe Stock/Ivan Kmit

A recent Zillow analysis reveals that adjustable-rate mortgage (ARM) applications are on the rise. To save money and avoid higher mortgage rates, more affluent purchasers are using ARMs coupled with larger down payments to buy more expensive homes. Typically, ARMs offer lower interest rates during the introductory period that could range from three to 10 years. Following the period, the interest rate can rise or fall.

In June, the share of applications for ARMs rose to 12.6% and then dropped slightly in July to 12.2%. Both months mark the first time that ARMs have risen above 12% since August 2007. "Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession," says Zillow senior economist Nicole Bachaud.

"It's important not to confuse some added risk for an individual borrower with risk to the housing market as a whole. Borrowers today are more financially prepared for home buying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road."

The analysis found that those who recently financed a home using an ARM make nearly $75,000 more than mortgage borrowers overall, and their down payment is over twice as large—23.6% instead of the typical 10%. In 2021, the median income of buyers who received an ARM loan was $165,000, compared with $91,000 for all borrowers.

However, findings share that while many recent borrowers have benefited from ARMs, Black mortgage borrowers have been more risk-averse in their use of such. For Black home buyers, approved ARMs were for a median property value lower than other Black borrowers overall, a reverse of all other groups in the analysis.

"Adjustable-rate and subprime loans disproportionately harmed Black homeowners during the foreclosure crisis," Bachaud says. "Black mortgage applicants, then, have reason to be more risk-averse in their use of ARMs, particularly in a time like today when housing market conditions are changing so quickly.

“While the popularity of ARMs is rising and the potential benefits are greater for the right type of buyer, the data shows Black home buyers are less willing to accept the added risk after facing greater obstacles to qualify for a mortgage, another signal that lending is a long way from equitable."