If you remember the financial crisis of 2008, you may recall how adjustable-rate mortgages, or ARMs, were a big part of the problem. But today, these types of loans are once again gaining popularity among homebuyers. In this blog post, we’ll explore why ARMs are making a comeback and why you shouldn’t be concerned about it.
The percentage of adjustable-rate mortgages has increased recently, according to data from the Mortgage Bankers Association (MBA):
The graph illustrates that, after remaining at around 3% of all mortgages in 2021, a large number of homeowners once more chose adjustable-rate mortgages in 2017. That rise can be explained easily. Mortgage rates significantly increased last year. Due to the higher borrowing costs associated with this type of loan and the lower rate offered by an ARM, some homeowners chose to take it out despite the higher borrowing costs.
So why are more people opting for ARMs instead of fixed-rate mortgages? One reason is that interest rates for ARMs are often lower than those for fixed-rate loans, making them more affordable in the short term. Additionally, some buyers may only plan to stay in their home for a few years, making an ARM a more practical option.
But what about the risks that ARMs pose? It’s true that adjustable-rate mortgages can be riskier than fixed-rate loans because the interest rate can change over time. However, it’s important to note that today’s ARMs are not the same as the ones that led to the housing crisis.
The main reason for this is that lending standards have tightened up since the 2008 crash. In the past, buyers could obtain ARMs without providing proof of their employment, assets, and income. This lax lending led to many people buying homes they couldn’t afford and ultimately defaulting on their loans. But today, banks and lenders require thorough verification of a buyer’s financial situation before approving an ARM or any other type of mortgage.
In fact, the stricter lending standards in place today mean that borrowers are more likely to be able to meet their loan obligations. And because of this, ARMs are not the risky proposition they once were. Instead, they can be a viable option for those who want lower interest rates and are comfortable with the potential for rate adjustments down the line.
Another benefit of ARMs is that they often come with caps on the amount the interest rate can increase at each adjustment period. This means that ARMs can be less risky than some buyers may think. For instance, if an ARM has a cap of 2%, the interest rate can only increase by 2% at each adjustment period, no matter how high market rates may rise.
All in all, adjustable-rate mortgages are making a comeback in today’s housing market. However, this doesn’t mean we’re headed for another crash. The tighter lending standards in place today mean that buyers are being vetted more thoroughly, making it less likely that borrowers who can’t afford their loans will slip through the cracks. Additionally, ARMs come with features like caps on interest rate increases that help mitigate risk for buyers. So if you’re in the market to buy a home and considering an adjustable-rate mortgage, don’t be afraid to explore this option. With the right research and planning, it could be the right choice for you.
