For mortgage borrowers, the ARM is making a comeback

With long-term fixed rate mortgage rates rising this year and house prices continuing to rise, the adjustable rate mortgage has made some comeback.

With long-term fixed rate mortgage rates rising rapidly this year and house prices continuing to rise, the adjustable rate mortgage (ARM) has made quite a comeback.

ARMs fell out of favor a few years ago, offering little advantage over historically low fixed rate loans. The rise in borrower interest in ARMs is reminiscent of the last housing boom of the 2000s, when rates were high.



Unlike then, underwriting standards are now much stricter and ARMs do not have hidden pitfalls such as upfront interest rates.

“The types of ARM products available are very different. For example, you now have ARM products that have fixed periods of five, seven or 10 years, compared to ARMs with different types of riskier features in the 2000s,” said Joel Kan, associate vice president of forecasting. economic and industrial MBA.

Lenders also consider the borrower’s current income against potentially larger monthly payments in the future.

Adjustable rate mortgages may be suitable for buyers who do not intend to stay in the home longer than the initial rate period. In today’s pricing environment, they can also facilitate affordability for other shoppers. But ARMs still come with risks that fixed-rate mortgages don’t.

“When the fixed term expires, that lower rate expires, whether it’s five to seven years, they need to be prepared for the higher payment, or the option to refinance or sell the home,” Kan said.

Applications for adjustable rate mortgages currently represent about 9% of all mortgage applications, so still a small share, and below the mid-2000s. But ARM mortgage volume has grown 70% since the beginning of this year.

Rising mortgage rates across the board have slowed borrowing by potential buyers. The MBA reported that the number of mortgage applications in the last week of May hit a three-and-a-half-year low.

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