The Return of Adjustable-Rate Mortgages is Nothing to Fear

Whether or not you remember the housing crash back in 2008, adjustable-rate mortgages (ARMs) were very popular back then. After the housing crash, ARMs were virtually nonexistent for many years. However, now people are once again using ARMs when buying a home. Let’s dive into why this is happening and why there is no cause for concern.

Why ARMs Have Recently Regained Popularity

The graph below shows how the percentage of adjustable-rate mortgages has increased over the past few years. The data comes from the Mortgage Bankers Association (MBA).

After hovering around 3% of all mortgages in 2021, many homeowners turned to adjustable rate mortgages again in 2022. As the graph shows, the use of ARMs spiked to nearly 11% in May 2022 and up to 13% in November 2022.

Believe it or not, but there is a simple explanation for the increase in using ARMs. In 2022, mortgage rates climbed dramatically. With higher traditional borrowing costs, some homeowners made the decision to take out this type of loan because an ARM would give them a lower rate.

Why Today’s Adjustable-Mortgage Rates Are Different

Keep in mind that today’s ARMs are not the same as the ones that became popular leading up to the 2008 housing crash. Part of what caused that housing crash was from loose lending standards. Back then, when a buyer chose to get an adjustable-rate mortgage, banks and lenders did not require proof of employment, assets, or income. Essentially, people were getting loans that they never should have been awarded. This set many homeowners up for trouble as they couldn’t pay back the loans that they never had to qualify for in the first place.

Today, lending standards are different. Lenders and banks have learned their hard-earned lesson from the crash, and now they verify income, assets, employment, and more. So this time around, today’s buyers using an adjustable-rate mortgage need to actually qualify for their loans and prove that they will be able to repay them.

Archana Pradhan, an economist at CoreLogic, helps to explain the difference between now and then:

“Around 60% of Adjustable-Rate Mortgages (ARM) that were originated in 2007 were low- or no-documentation loans... Similarly, in 2005, 29% of ARM borrowers had credit scores below 640... Currently, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, require full documentation, are amortized, and are made to borrowers with credit scores above 640.”

Additionally, Laurie Goodman at Urban Institute emphasizes this point by saying that: “Today’s Adjustable-Rate Mortgages are no riskier than other mortgage products and their lower monthly payments could increase access to homeownership for more potential buyers.”

Wrapping Things Up

As you can see, the return of adjustable-rate mortgages is nothing to fear as today’s standards are much different.

If you are a first-time buyer or looking to buy your next home in Southwest Florida and are curious about obtaining an adjustable-rate mortgage, speak to real estate professional Dianne Anderson today.

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