With long-term fixed rate mortgage rates quickly moving higher this year, and home prices continuing to rise, the adjustable-rate mortgage (ARM) has made somewhat of a comeback.
ARMs fell out of favor a few years ago, offering little advantage over historically low fixed-rate loans. The increase in borrower interest in ARMs is reminiscent of the last housing boom in the 2000s, when rates were high.
Unlike then, underwriting standards now are much more strict, and ARMs don鈥檛 come with hidden traps such as up-front teaser rates.
鈥淭he types of ARM products that are available are very different. For example, now you have ARM products that have five, seven or 10-year fixed periods, versus ARMs with different kinds of more risky features back in the 2000s,” said Joel Kan, MBA鈥檚 associate vice president of economic and industry forecasting.
Lenders also now factor in a borrower鈥檚 current income when compared to potentially larger monthly payments down the road.
Adjustable-rate mortgages may make sense for buyers who don鈥檛 intend to stay in the home longer than the initial rate period. In today鈥檚 rate environment, they can also ease affordability for other buyers. But ARMs still have risks that fixed-rate mortgages do not.
鈥淲hen the fixed period expires, that lower rate expires, whether it鈥檚 five to seven years, they have to be prepared for the higher payment, or the possibility of refinancing, or selling the home,鈥� Kan said.
Mortgage applications for adjustable-rate mortgages make up about 9% of all mortgage applications now, so still a small share, and below the mid-2000s. But ARM mortgage volume has risen 70% just since the beginning of this year.
Rising mortgage rates across the board have slowed potential buyer borrowing. The MBA reported the number of mortgage applications in the final week of May hit a three-and-a-half year low.
