Adjustable-Rate Mortgages Stage Comeback After Scrutiny

Adjustable Rate Mortgage (ARM) papers in the office

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Adjustable-rate mortgages became unpopular after 2008 financial crisis, but they are reemerging as buyers contend with record high home prices. “The epic surge in home prices has people looking to save money on monthly payments anywhere they can,” Matt Graham, chief of operations at Mortgage News Daily, told®.

Applications for ARMs are up 12.5% year over year for the week ending June 18, according to the Mortgage Bankers Association.

ARMs offer mortgage rates that reset after a period of five or 10 years. If rates go up by the time borrowers’ loans reset, they will likely face higher monthly mortgage payments. Financial experts warn that borrowers taking out ARMs today at historically low rates likely will face higher rates and payments in the future.

The average rate for a 5-year hybrid adjustable-rate mortgage was 2.54% for the week ending July 1, according to Freddie Mac. The average rate for the 30-year fixed-rate mortgage was 2.98%. Those two rates may not be far apart, but even minor differences in rates can quickly add up.

Still, lenders say that only the most qualified borrowers are getting approved for ARMs; they tend to have higher credit scores and put more money down than fixed-rate mortgage borrowers. There is also more education around these loans than in the days of the financial crisis. Interest-only ARMs are also less prevalent.

ARMs are a relatively small part of the mortgage market, comprising just 3.6% of applications for the week ending June 25, according to the Mortgage Bankers Association.

In general, financial experts say ARMs are less useful for homeowners who plan to stay in their homes for decades. But for those who plan to stay in their homes for less time, ARMs may be more attractive.

ARMs are most popular among borrowers seeking higher-priced mortgages. The average ARM loan size was $904,000 compared to $317,500 for a fixed-rate loan for the week ending June 25, according to the MBA’s data.