By SCOTT KIMBLER
It is being reported that the typical homebuyer could save an estimated $15,582 over five years if they take out an adjustable-rate mortgage and some borrowers are wondering if the risks are worth the rewards.
On Friday, Redfin published an article by Lily Katz and Taylor Marr which stated that demand for adjustable-rate mortgages is on the rise because they typically have lower interest rates than 30-year fixed loans.
The Redfin analysis used the estimated monthly mortgage payment on a median asking price home during the four weeks ending May 12. The amount used for calculations was $410,700.
The analysis found that the monthly payment for buyers who took out a 5/1 ARM was an estimated $2,164 during the four weeks ending May 12.
That was about 11% – or $260 – lower a month than the estimated $2,423 payment for buyers who took out a 30-year fixed-rate mortgage.
In the 1990s and early 2000s, adjustable-rate mortgages were popular.
Homebuyers used them to get into a first-time home purchase.
Homeowners took advantage of adjustable-rate mortgages to upgrade to a larger home as their families grew.
But they fell out of favor due to the nature of an adjustable rate and many Americans found they had shot themselves in the foot if they got caught in a rate that went above their means.
Now that the prices of homes are soaring, and there seems to be no end in site for rising costs, the ARM is making its way back into conversations with lenders.
Redfin reports that adjustable-rate mortgages made up 10.8% of all mortgage applications during the week ending May 6. That is up from 3.1% at the start of 2022 and the highest share since 2008, when a lack of regulation of ARMs helped contribute to the housing crash.
Though the idea has been slow to take hold with many borrowers, the term is being floated around more often than before.
“I am not big on ARMS,” said Matt Abraham of Homestar Financial. “I have been doing this for 24-years and people’s living situation can be unpredictable. Even though there are the best intentions of exiting an ARM, sometimes it just doesn’t work out that way.”
Abraham said there are people an ARM is good for, but if borrowers plan to get in it is key to plan to get out.
“If you definitely know you are exiting a property, an ARM can be a good thing. Military people are a good example of someone who will be relocating in a few years. That sort of example, an ARM could be a good thing to go with,” Abraham said.
Jerry Stover of Homeowner Mortgage agrees, but also advises caution when considering an ARM.
“I’m starting to see more people inquire about it, but not an uptick in people actually doing one,” Stover said. “The advantage to that is you are getting a lower rate in hopes that at some point in the next year or two that rates go down and you can refinance into a fixed-rate mortgage at a lower rate. Or if you do a 3-year, 5-year, or 7-year ARM, that you are planning on being there for only that three, five, or seven years. Then there would be an advantage for being in an ARM.”
Stover added if borrowers are planning on being in a home awhile, that decision brings with it risk.
“If your goal is to stay in a home a lot longer and if rates didn’t stabilize and keep going up, then those people are going to lose out,” Stover said.
Stover said people are calling the rates high because there has been a recent rise. What we are seeing right now is not considered a high rate, he explained.
“People are calling the rates high,” Stover said. “But historically we are still on the lower end of what the rates are over the last 100 years. People who say the rates are high, they are just not making an accurate statement. There are a lot of people who are coming of age, 25 to 30-years olds have just not seen this high in their adult lifetime. Somebody like me, however, that is different. When I started doing mortgages in 2000, rates were in the 7s and 8s. So, I’ve seen rates in the 8s and I’ve seen them go down. When I bought my home in 2003, I got a 5.374% rate and thought that was a good rate, at that time.”
An adjustable-rate mortgage could be a good thing for people who are investing in the property and do not plan to live there at all.
“For people who invest in property, who are doing an appreciation type of portfolio, could do well with an ARM because they likely have an exit date out of the property. Also people who have expendable income sometimes take an ARM because they can afford to absorb the risk, should they get caught in a higher adjustment,” Abraham said.
But in general, Abraham attempts to steer people away.
“Future rates can climb,” he said. “And they can climb a lot. Things can skyrocket. I use the 70’s as a good example. Oil kind of triggered inflation. The government injected a lot of cash into the economy, we were coming off the Gold Standard and we spent a lot of money on the Vietnam War. Then in the 80’s where the Treasury Secretary said inflation would kill an economy. So they drove interest rates through the roof to stabilize the economy. ARMs were more tempting, but people planned to exit the mortgage of the property, but then many did not do it. A lot of people lost their home by not getting out.”
Abraham concluded; ARMs are, in general, just not a good idea.
Both Stover and Abraham try to steer buyers away from ARMs, and say if the rates get up into the 7%, 8%, and 9% range they will likely become popular again. The difference this time, compared to the period leading up to the 2008 recession is there are safeguards for lenders and buyers in place.
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