1 in 4 First-Time Home Buyers Today Are Considering an Adjustable-Rate Mortgage. Here Are 2 Pros and Cons

It's hardly a secret that today's mortgage rates are the highest they've been in years. So if you're in the process of trying to buy a home, you may be inclined to sign an adjustable-rate mortgage, or ARM.

In a recent survey of first-time home buyers by TD Bank, 23% of respondents said they're considering an ARM, up from 12% in 2023. But should you go that route if you're looking to buy? Here are a couple of pros and cons to be aware of if an adjustable-rate mortgage is on your radar.

Pro No. 1: You can get a lower starting interest rate

The average 30-year mortgage rate as of this writing is 7.22%, according to Freddie Mac. With an ARM, you might end up with a lower interest rate initially. That could result in a world of savings on your monthly payments.

And while your initial interest rate isn't guaranteed, if you sign a 5/1 ARM, for example, you get a five-year period where your initial interest rate is fixed. That gives you a lot of time to explore options like refinancing your mortgage before your rate has the potential to rise.

Pro No. 2: You can get a break from higher monthly payments at a time when you may be grappling with other costs

Moving into a new home can be an expensive prospect. First, there's the cost of hiring movers themselves, which could be substantial depending on the amount of stuff you have and the distance it's being transported.

Also, you may have to make some initial repairs when you first move into your home. And so at a time when you might be facing temporary but substantial expenses, it can be helpful to have lower monthly mortgage payments to deal with.

Con No. 1: You risk seeing your mortgage rate climb after a period

When you sign an ARM, you run the risk of your mortgage rate rising to a level that's higher than your initial rate. The result? Higher monthly payments than you're used to. However, this risk may be lower right now due to where interest rates are.

The Federal Reserve is expected to start cutting interest rates later this year, which could lead borrowing rates across the board to start falling. In the coming years, we may see a general decline in mortgage rates so that by the time your home loan's rate starts to adjust, it won't adjust for the worse.

Still, no one can predict the future. If you're going to sign an adjustable-rate mortgage, you must brace -- and save -- for the possibility of ending up with a higher rate.

Con No. 2: You'll have less peace of mind

When you sign a 30-year fixed mortgage, you know what your monthly payments will look like for the next three decades unless you make a change, like refinance. That could not only make it easier to plan out your finances and save for different goals, but it might give you more peace of mind in general.

With an ARM, you don't get the same peace of mind. You might hesitate, for example, to pump more money into your kids' college fund in the coming years knowing that your mortgage payments might start to cost more down the line.

All told, an ARM could be your ticket to lower mortgage payments in the near term. But consider the risk you're taking on before moving forward. If you can afford your monthly payments based on what a fixed 30-year mortgage will cost you, you may want to go that route and then plan on refinancing when the time is right. That way, you'll get the comfort of knowing you can manage your payments even if they never get better, but you also won't run the risk of them getting worse.