A growing number of American homebuyers are turning to adjustable-rate mortgages (ARMs) and temporary buydowns as a way of easing the initial repayment burden when they are faced with persistently high interest rates. This is a new report from ICE Mortgage Technology that indicates more than 8% of borrowers will be using these financing structures by 2025, which indicates that there is a growing reliance on tools designed to lower payments during the first years of a loan. 

Even though these products have been popular among consumers as a way of navigating affordability challenges in a high-cost borrowing environment, the report cautions that they pose inherent risks, particularly since interest rate adjustments and buydown periods could significantly increase future repayment obligations if these products are not properly handled. According to the latest U.S. Home Equity & Underwater Report from ATTOM released in Q1 2025, homeowner equity across the country is not the same. 

In the first quarter, 46.2% of mortgaged residential properties were categorised as equity-rich, which indicates that the total loan balance secured by those homes did not exceed half of the market value of those homes. It is estimated that the share of the market has fallen steadily since it peaked at 49.2 per cent in the second quarter of last year—disappearing from 47.7 per cent in the final quarter of 2024—but still stands at about twice what it was in early 2020. 

The CEO of ATOM, Rob Barber, said that seasonal trends suggest the early-year dip is not uncommon. Historically, the first quarter marks the lowest point in equity-rich proportions before they rebound back to normal in the spring. Additionally, according to the report, there has been a modest increase in financial strain. 

The share of properties with seriously underwater mortgages—where debt exceeds the value of the property by at least 25 per cent—has increased from 2.5 per cent in late 2024 to 2.8 per cent in the first quarter of 2025. In the past year, new research has indicated that negative equity is becoming more prevalent, especially among those who purchased their home during the height of the pandemic-driven housing boom, indicating that negative equity is becoming more prevalent in the area. 

In spite of the modest increase in these cases nationwide, certain Sunbelt markets are experiencing much steeper rises. According to Intercontinental Exchange figures, Cape Coral, Florida, has the highest number of underwater mortgages, with 7.8% of homes, followed by Lakeland at 4.4 per cent, San Antonio at 4.3per centt, Austin at 4.2, and North Port at 3.8. 

Analysts report that these markets, which have seen some of the fastest price growth in recent years, are now experiencing the sharpest hofusing market corrections in their history. According to the ICE Home Price Index, home prices have been growing at a slower rate as of early June than they have in years past, with nearly one-third of the largest U.S. housing markets experiencing price declines of at least one percentage point from recent highs. 

Even though this cooling might theoretically ease affordability pressures, ICE warns that it may hurt the equity positions of recent buyers, especially those who obtained low-down-payment financing through the FHA or VA system. Based on the firm's data, one out of every four seriously delinquent loans would become negatively impacted if sold at distressed prices. It is already evident that certain markets are experiencing the impact of a declining economy. 

For example, 27 per cent of mortgages originated in Cape Coral, Florida, in 2023 and 2024 are underwater, while 18 per cent of mortgages originated in Austin, Texas, are underwater. Andy Walden, who heads ICE's mortgage and housing market research, believes that borrowers with a limited amount of equity-especially those who just purchased a house recently-are the most likely to be affected by the drop in home prices. 

A second source of stress was the return of federal student loan payments and collections in May, according to ICE. A study from ICE McDash and TransUnion revealed that almost 20 per cent of mortgage holders also have student loan debt, a figure which rises to almost 30 per cent for FHA borrowers. 

According to a study, students who have fallen behind on their student loans were four times more likely to fall behind on their mortgage payments, which emphasises the compounding effect student debt has on housing instability. The most vulnerable homeowners are those with mortgages with a low down payment, such as those with FHA and VA loans. 

It has been estimated that nearly three-quarters of all underwater loans in recent years are backed by government-backed products, which were widely used during the housing boom by first-time and moderate-income buyers. This represents the entire increase in mortgage delinquencies over the past year, according to ICE. 

While negative equity is still a significant limitation for homeowners today because the lending environment is much stricter than it was before the 2008 housing crash, thereby reducing the likelihood of a foreclosure wave, negative equity still carries significant limitations on the market today. There is a possibility that it will lock owners in place, preventing them from selling or refinancing their homes, and while many will continue to make payments without immediate hardship, further price decreases or a weakening job market can only lead to increased financial difficulties. 

According to Redfin economist Chen Zhao, by the end of the year, the national home price will drop about 1 peper suggesting that there may be a continued increase in underwater cases. A study from ICE McDash and TransUnion revealed that almost 20 per cent of mortgage holders also have student loan debt, a figure which rises to almost 30 per cent for FHA borrowers. 

According to a study, students who have fallen behind on their student loans were four times more likely to fall behind on their mortgage payments, which emphasises the compounding effect student debt has on housing instability. The most vulnerable homeowners are those with mortgages with a low down payment, such as those with FHA and VA loans. It has been estimated that nearly three-quarters of all underwater loans in recent years are backed by government-backed products, which were widely used during the housing boom by first-time and moderate-income buyers. This represents the entire increase in mortgage delinquencies over the past year, according to ICE. 

While negative equity is still a significant limitation for homeowners today because the lending environment is much stricter than it was before the 2008 housing crash, thereby reducing the likelihood of a foreclosure wave, negative equity still carries significant limitations on the market today. There is a possibility that it will lock owners in place, preventing them from selling or refinancing their homes, and while many will continue to make payments without immediate hardship, further price decreases or a weakening job market can only lead to increased financial difficulties. 

According to Redfin economist Chen Zhao, by the end of the year, the national home price will drop about 1 per cent, suggesting that there may be a continued increase in underwater cases. Although there are considerable equity cushions from pandemic gains and tighter lending standards, which might mitigate broader fallouts, the trend is still regarded as a warning rather than a full-blown crisis at this time. For buyers in vulnerable markets, equity and timing are critical factors to consider when buying.

It has been reported that market analysts are pointing out that there is a transitional housing environment rather than a free fall as a result of the prevailing mix of cooled home prices, changing mortgage structures, and concentrated pockets of negative equity. Several trends have been observed in Florida, Texas, and other high-growth regions, demonstrating how localised market dynamics can differ sharply from national averages. This was particularly evident in areas that experienced rapid appreciation during the pandemic. 

According to experts, even though stronger lending standards and high levels of homeowner equity still contain systemic risk, the concentration of vulnerability among recent buyers and borrowers who have made low down payments deserves careful observation. When economic conditions worsen, the combination of mortgage performance, affordability concerns, and external financial pressures, such as student loan obligations, may create stress points in certain markets. 

Policymakers, lenders, and prospective buyers alike can take solace from the current data on housing's cyclical nature, which serves to highlight both the cyclical nature of the housing market as well as the need to anticipate how affordability tools, equity positions, and market corrections will connect to each other in the months to come.