With mortgage rates on the rise, more borrowers are opting for adjustable-rate mortgages (ARMs) as a potential solution.
Data shows that ARMs made up around 10% of all mortgage applications in September, marking the highest level in nearly two years and significantly above the approximately 6% average since 2008, according to the Mortgage Bankers Association (MBA).
These loans generally start with lower initial rates compared to fixed-rate mortgages, but there’s a chance those costs could climb over time. It’s worth noting that back in 2005, ARMs accounted for 35% of all applications, which created financial strain for many homeowners due to increasing payments.
Today, the situation is somewhat different. The MBA highlights that we’re not nearing those levels again, thanks to various reasons that shift the current landscape.
“Most ARMs these days feature fixed terms of five, seven, or ten years, and borrowers are assessed based on fully indexed interest rates,” explained Joel Kang, Vice President and Deputy Chief Economist at the MBA.
Kang pointed out that today’s ARMs carry significantly less risk than those issued before 2008, with many qualifying borrowers enjoying better credit scores. Additionally, the gap between ARMs and fixed-rate loans has widened, potentially offering substantial savings—around $200 monthly on a $400,000 loan.
The uptick in ARMs highlights a housing market where affordability has become a pressing issue, prompting borrowers to search for more favorable options.
As of last week, the average interest rate for a 5/1 ARM (which adjusts after five years) stood at 5.66%, lower than the 30-year fixed rate average of 6.30%.
While this growing interest in ARMs doesn’t necessarily indicate an imminent housing crisis, there are still inherent risks. There’s uncertainty regarding what your mortgage will look like years down the line.
The Consumer Financial Protection Bureau advises those considering ARMs to fully understand how much and how often their interest rate could fluctuate, along with whether there’s any cap on potential increases.
Despite the recent spike in ARMs’ popularity, overall lending levels for these loans remain relatively modest, at about a quarter of what they were on average in 2008, according to MBA reports.
