More Buyers Turn to ARM Loans

Rising interest rates are prompting more home buyers to turn to adjustable-rate mortgages—which come with potential financial risks. Though these mortgages typically come with lower interest rates initially, they reset to market rates after five or seven years, potentially shocking borrowers with much higher costs.

“As interest rates continue to rise, the percentage of adjustable-rate mortgages is increasing, as home buyers are looking to take advantage of the best rates from their lenders,” says Jonathan Corr, president and CEO of Ellie Mae.

Source: “Ellie Mae Origination Insights Report: October 2018,” Ellie Mae (Nov. 21, 2018)

ARMs Rise in Popularity as Rates Increase

More borrowers are turning to shorter-term adjustable-rate mortgages as interest rates rise, but that may be a riskier move than your clients realize. While these mortgages offer lower interest rates, the rates reset after a certain preset time. Still, a five-year hybrid adjustable-rate mortgage averaged a 3.28 percent rate last week compared to 4.30 for the 30-year fixed-rate mortgage, according to Freddie Mac’s weekly mortgage market survey.

The share of ARMs in total mortgage application volume has doubled to 9 percent since November 2016. The highest level of ARM applications since October 2014. “Home buyers in a strong housing market are looking for ways to extend their purchasing power, and ARMs are one way to do that,” says Mike Fratantoni, chief economist for the Mortgage Bankers Association. “While the ARM share got as high as 35 percent pre-crisis, it is really unlikely it will get nearly as high now, given [new] regulations, which effectively prohibit many types of ARMs that were prevalent then.”

Source: “Mortgage Applications Fall 2.7%, as Borrowers Turn to Riskier Loans,” CNBC (March 22, 2017)

Fixed-Rate Mortgages Losing Popularity?

A resurgence is occurring with adjustable-rate mortgages, as more borrowers explore their options beyond 30-year fixed-rate mortgages, according to Freddie Mac’s annual ARM survey. As 30-year rates trend higher, more borrowers are being lured to the low introductory rates of ARMs, which remain near historical lows, the report shows.

“Home buyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment,” says Frank Nothaft, Freddie Mac’s chief economist. “As longer-term rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants. Hybrid ARMs are particularly attractive because they have an initial extended fixed-rate period of three to 10 years.”

Hybrid ARMs — particularly the 5/1 — are the most popular loan product chosen by ARM borrowers, according to the Freddie Mac survey.

“Borrowers who have taken out ARMs generally prefer hybrids, because these products include an extended initial period where the interest rate is fixed,” Nothaft says.

For a borrower taking out a 30-year, 5/1 hybrid ARM instead of a 30-year fixed-rate mortgage, the savings was about 1.36 percentage points in January, Freddie shows. This would amount to a savings on the monthly principal and interest payment of about $194 on a $250,000 loan for the first five years.

Source: “Fixed-rate mortgages tumble in popularity,” HousingWire (Jan. 28, 2014) and “Higher Rates Should Lead to ARM Resurgence, Freddie Mac Says,” Mortgage News Daily (Jan. 28, 2014)