Adjustable-Rate Mortgages Are Resurgent in Today's Market

Adjustable-rate Mortgages Gaining Popularity

Adjustable-rate mortgages, or ARMs, made up about 10 percent of all mortgage applications in September — the highest share in nearly two years and well above the post-2008 average of 6 percent, according to the Mortgage Bankers Association (MBA).

Understanding Today’s ARMs

ARMs, also known as variable-rate mortgages, typically start with lower borrowing costs than fixed-rate mortgages but can increase over time. That increase in payments caused challenges for many homeowners two decades ago when ARMs peaked at 35 percent of applications in 2005.

However, we are in a different landscape now, as highlighted by the MBA. Most ARM loans now have fixed terms of 5, 7, and 10 years, with borrowers underwritten to the fully indexed rate.

Joel Kan, the MBA vice president and deputy chief economist, noted that current ARM loans are significantly less risky than those from the pre-2008 era, with borrowers typically having better credit profiles. In fact, shifting to an ARM can save approximately $200 monthly on a $400,000 loan due to the widening spread between ARMs and fixed-rate mortgages.

Market Dynamics Impacting ARMs

The increase in ARM applications indicates a housing market where affordability issues prompt borrowers to seek alternatives. As of last week, the average interest rate on a 5/1 adjustable-rate mortgage was 5.66 percent, notably lower than the 30-year fixed average of 6.30 percent.

While the surge in ARM interest may not indicate a forthcoming housing crisis, prospective borrowers should be aware of associated risks. The Consumer Financial Protection Bureau emphasizes the necessity of grasping how interest rates might fluctuate with each adjustment, how frequently the rate can change, and whether caps exist on potential rate spikes.

Despite the recent growth in ARMs, their overall volume stays relatively low at approximately one-fourth of the 2008 average.