with magnification mortgage rates Y real estate prices making it difficult to buy a home, the adjustable rate mortgage is making a comeback.
Consumer interest in ARMs has been on the rise and is now at its highest level since 2019, according to data from the Mortgage Bankers Association. In the past week, more than 9% of new mortgages were adjustable-rate loans, while in dollar terms, ARMs accounted for 17% of all new mortgage debt last week, according to the group. The ratio of ARMs as a percentage of home loans is double what it was three months ago.
“In a period of high home price growth and rapidly rising mortgage rates, borrowers continued to mitigate higher monthly payments by taking out ARM loans,” Joel Kan, MBA’s head of economic and industry forecasting, said in a report.
Higher interest rates are the main reason for the renewed interest in ARMs, and adjustable-rate mortgages generally become more popular when interest rates on fixed-rate products rise. Today’s ARMs are “hybrid”: They offer low fixed interest rates for the first three, five, seven, or 10 years of a loan, after which the rate changes to a variable, and usually higher, rate.
The the cost of a mortgage has increased since the beginning of the year, rising as lenders anticipate rate hikes from the Federal Reserve. That’s on top of double-digit increases in home prices, a pace that some economists say could signal a housing bubble.
The average interest rate on a 30-year mortgage soared to 5.11% last week, according to Freddie Mac. That’s the highest level in a decade and nearly 2 percentage points higher than average rates at the beginning of anus. On a median-priced home, that higher interest rate translates to paying an extra $360 per month. By comparison, the introductory rate for an ARM with a fixed five-year introductory period was 3.75%.
Financial experts say ARMs can be a good option for homeowners who plan to sell their home in a short period of time or who are confident their income will increase.
But because they are effectively a bet that the future will be brighter than the present, ARMs can also be risky. During the 2007 housing crash, many ARM borrowers were unable to make ever-increasing payments; Because home values had plummeted, they were also unable to refinance or sell their home. Many of them ended up in default and in foreclosure.
Although more borrowers are turning to ARMs, they are not as widespread as they were before the housing crisis, when more than a third of all new mortgages were adjustable-rate.