Adjustable-Rate Mortgages (ARMs) have been increasing over the past few months. Data released by the Mortgage Bankers Association in May showed that ARMs made up almost 10% of mortgage applications in the United States, compared to just 3% at the beginning of the year. Why are ARMs so popular?
Introductory Rates
An ARM typically offers favorable introductory rates with a low-interest rate that will be fixed for 3, 5, or 10 years. Lower rates can be attractive when interest rates are at an all-time high. The low introductory rate gives borrowers an extra cushion for repairs or savings in the first several years of owning their home.
Once the introductory rate term expires, the interest will adjust to meet market conditions. Very rarely do payments decrease, however. Many folks opt for the adjustable option with the idea that they can enjoy the low rate up front and save enough money to cover higher monthly payments in the future. However, that is a serious gamble and does not always work out the way homeowners intended. A lot can happen in five or ten years – we hope careers will advance and things will remain on an upward trajectory, but unfortunately, that is not always the case.
Length of the Loan
An ARM can be advantageous for folks who don’t expect to hold onto the house for long. Some homeowners get in with the low introductory offer and then sell before the mortgage adjusts. However, real estate is cyclical, so there is no guarantee that the market will move as quickly as it needs to when it’s time to sell. Homeowners could get themselves in a bind if they need to sell quickly in a slow market. They could find themselves accepting an offer that is less than what they paid for the home.
Safer than 2008
In 2008 ARMs allowed borrowers to go years only paying interest. That practice led to a shocking price tag when the rates were adjusted. Payments abruptly doubled, which caused many homeowners to default on their loans and lose their homes. As a result, ARM loans cap their rate increases so they won’t skyrocket uncontrollably. These limits are set so that homeowners can pay the adjusted amount. ARMs are also more challenging to get these days; lenders aren’t just handing them out as they did in 2008. Mortgage companies are conducting much better risk assessments of borrowers now and requiring much more proof of income documentation. Lenders are better at explaining the adjustments and helping borrowers determine if their existing income can absorb future shifts.
When getting a home loan, there are several factors to consider, with interest rates typically holding the most weight. Experts recommend shopping lenders and comparing term options. Understanding your options is essential to understanding the long-term effects of each.
Prism Realty focuses on the market to provide accurate and timely data. Contact Us to answer questions about Austin area homes, neighborhoods, or the current real estate market – info@prismrp.com | 512-676-5842.