(NewsNation) — With mortgage rates elevated, more borrowers are turning to adjustable-rate loans for relief.
Adjustable-rate mortgages, or ARMs, made up about 10% of all mortgage applications in September — the highest share in nearly two years and well above the post-2008 average of 6%, according to the Mortgage Bankers Association.
ARMs, also known as variable-rate mortgages, usually start with lower borrowing costs than fixed-rate mortgages but can increase over time. That step-up in payments is what got many homeowners in trouble two decades ago, when ARMs peaked at 35% of all mortgage applications in 2005.
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We’re a long way from that level today — and there are several reasons it’s a “vastly different environment” now, according to the MBA.
“Most ARM loans now have fixed terms of 5, 7, and 10 years, and borrowers are underwritten to the fully indexed rate,” wrote Joel Kan, vice president and deputy chief economist at the MBA.
Kan said today’s ARM loans are significantly less risky than those originated before 2008, and borrowers who qualify tend to have better credit profiles. In today’s market, moving to an ARM can result in real savings — roughly $200 per month on a $400,000 loan — because the spread between ARMs and fixed-rate mortgages has widened.
The recent uptick in ARMs reflects a housing market where borrowers are struggling with affordability and looking for any edge they can get.
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As of last week, the average interest rate on a 5/1 adjustable-rate mortgage — which resets after 5 years — was 5.66%, below the 30-year fixed average of 6.30%.
And while the recent interest in ARMs may not signal a looming housing crisis, there are still risks to be aware of. It’s not clear, for example, where mortgages will be years from now.
The Consumer Financial Protection Bureau urges anyone considering an ARM to understand how high or low their interest rate could move with each adjustment, how frequently the rate can change and whether there’s a cap on how high the rate could eventually go.
MBA’s data shows that although ARMs have grown more popular recently, the overall level of ARM loans remained relatively low in September, about one-fourth of the 2008 average.
