Adjustable-rate home mortgages are coming back in a big way.
Shunned while mortgage interest rates hit rock bottom over the last two years, adjustable-rate mortgages (ARMs) have started looking a lot better to borrowers since interest rates for fixed loans have soared recently to their highest levels in more than a decade, according to data from the Mortgage Bankers Association. After falling to a pandemic-era low, the percentage of mortgage applications submitted for adjustable- rather than fixed-rate loans has climbed much of the year and last week reached its highest point since 2008, as shown in the chart below.
As opposed to fixed-rate mortgages, where the interest rate stays the same over the life of the loan, rates for adjustable mortgages go up or down along with a benchmark such as the secured overnight financing rate (SOFR). Typically, ARM interest rates are fixed for several years and then are adjusted on a set timetable after that. For example, a 5/1 ARM will have a fixed rate for five years and will be adjusted once a year for the life of the loan.
The reason for the ARMs comeback has everything to do with rates, said Joel Kan, the association’s associate vice president of economic and industry forecasting. Because ARMs typically start off with a lower interest rate than fixed-rate loans, they’re a tempting way for homebuyers to reduce their monthly mortgage payments in a housing market where rising mortgage rates and home prices have been driving payments up dramatically. (The average rate for a 5/1 ARM was 4.37% Wednesday, compared to 5.86% for a 30-year fixed-rate loan, according to lender data provided to The Balance.)
“People who are out there in the market looking to buy are looking for really just any way they can to try to deal with the issue of affordability,” Kan said.
That lower interest rate comes with a pretty big downside, though: the possibility that rates could rise in the future. That would leave borrowers with the choice of making higher monthly payments, refinancing, or selling their home.
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