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’t come with hidden traps such as up-front teaser rates.
“The 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’s associate vice president of economic and industry forecasting.
Lenders also now factor in a borrower’s current income when compared to potentially larger monthly payments down the road.
Adjustable-rate mortgages may make sense for buyers who don’t intend to stay in the home longer than the initial rate period. In today’s rate environment, they can also ease affordability for other buyers. But ARMs still have risks that fixed-rate mortgages do not.
“When the fixed period expires, that lower rate expires, whether it’s five to seven years, they have to be prepared for the higher payment, or the possibility of refinancing, or selling the home,” 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.