While some customers are ready to jump with rate adjustments upcoming, others will hold with low rate caps on existing loans
While some homeowners with adjustable-rate mortgages (ARMs) may be ready to enter the market as rates get set to adjust, others are holding on thanks to rate caps lower than current interest rates.
Low current rates on ARM loans have been gaining traction with borrowers in recent weeks. And with ARM loans taken out during the pandemic set to adjust, some homeowners might consider the adjustment a good time to sell their property.
But JR Younathan (pictured top), senior vice president and regional retail mortgage manager at California Bank and Trust, cautions that some homeowners with ARM loans might have a rate cap that is too good to give up.
“Most clients we are seeing go into their fully adjustable rate also have rate caps to protect them,” Younathan told Mortgage Professional America. “So, if a client had a 2.875% five-year ARM come adjustable, our rate cap is a 2/2/6, meaning 2% first year, 2% every year thereafter, and a lifetime cap of 6%, and that is in addition to their start rate.
“This client could see a 4.875% rate in year one, a 6.875% rate in year two, and a lifetime cap of 8.875% in year three. All this to say that the initial rate adjustment will likely still be an attractive rate.”
Because of the rate caps, and with rates still elevated, homeowners with rate caps may still find the difference between their first adjusted rate and the current rate too high to make a move.
How to work with existing ARM clients
For mortgage brokers working with customers holding on to these ARM rates, Younathan said the broker has a couple of options to help them out.
“For brokers and loan officers working with current ARM customers who are rate-capped and may be less likely to jump into a new mortgage, a broker should consider the client’s needs,” Younathan said. “If the client needs cash, conduct a full rate analysis, blending the first mortgage rate with a potential second mortgage rate to identify opportunities for a first trust deed refinance with cash out.”
Younathan notes that some clients may not want to give up their ARM loan. For those customers, taking out a home equity loan may be a good move.
“A HELOC might be the best option,” Younathan said. “Consider the purpose of the cash, such as paying off high-rate debt, or making payments. If that’s the case, then it’s probably good to do a payment savings analysis in both situations. I think it’s also important to understand the personal tax implications regarding deductions.”
Elevated interest rates continue to weigh down new mortgage applications, as market turmoil following the Trump administration’s tariffs has kept rates high. According to the Mortgage Bankers Association (MBA) weekly application report, total applications dropped by 4.2%.
As Trump-era tariffs disrupt markets, Curinos’ Rich Martin sees a troubling trend—fear and uncertainty replacing confidence in housing. He urges brokers to seize local opportunities. https://t.co/APxQIOp6js
— Mortgage Professional America Magazine (@MPAMagazineUS) April 29, 2025
For some existing ARM customers ready to purchase a new home or refinance to unlock equity, a new ARM may be something to consider.
Under the right loan conditions, lower rates have been found in the ARM mortgage. Grant Hall, senior loan pro and team lead at Rosegate Mortgage, told Mortgage Professional America that there have been some rate bargains in the ARM market.
“Since we crossed over into 2025, that spread between what you can get on a seven-year ARM versus that of a 30-year mortgage, the gap is wide enough to where you can see that net tangible benefit,” Hall said. “ARMs are gaining a lot of ground with reception from the borrower side, because they can see those monthly savings they can capture with that ARM.”
No leftover concern from 2008
Brokers know that homebuyers and refinancers can be hesitant to take on an adjustable-rate mortgage. Younathan doesn’t believe there is any leftover concern from the 2008 housing crisis, however.
“The majority of clients know well enough that the 2008 debacle had far more detrimental influences, far removed from the consumer and any one product that was offered,” Younathan said. “The major catalyst at the street level was the income verification portion. We document the ability to repay by every client with adequate reserves.
“Clients can afford these loans and have appropriate time horizons on ARM loans to make the right decisions that fit their financial goals. So, I don’t see how the two can be conflated.”
When working with hesitant buyers in the current market, Younathan analyzes each client’s situation to find the right path forward.
“It’s always time horizon, payment shock and purpose,” Younathan said. “The more I understand their total financial situation, profile and needs, the better I can present to them options that would be opportunistic in achieving those goals. Clients sometimes haven’t even begun to think through some of the concepts, so it’d be good for originators to be inquisitive at first.
“Begin digging deeper into the client’s motives over a longer term, such as 10 to 20 years. This will help guide you in what might be a better presentation of options.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
