Buyers Reach for ARMs as Prices Swell

October 5, 2017

As home prices heat up across the country, buyers looking to lower their monthly mortgage payment are being lured to adjustable rate mortgages.

ARM originations surged over 40 percent in the second quarter compared to the first, according to Inside Mortgage Finance data.

ARMs are currently offering lower interest rates than fixed-rate mortgages. The average 30-year fixed-rate mortgage was 4.11 percent last week; a five-year ARM averaged 3.38 percent, according to the Mortgage Bankers Association.

ARMs usually offer an interest rate for a fixed period, such as five or seven years. Then, the rate can change depending on the broader market rate.

ARM originations typically increase from the first to the second quarter of each year since spring is the busiest time of year for home purchases. However, the jump in ARMs in the spring of 2016 was 15 percent compared to 2017’s 40 percent jump, CNBC reports.

Some in the housing industry are cautious about the uptick in ARMs again. ARMs were blamed for igniting the housing crisis in the late 2000s and leading to an elevated number of homeowners who defaulted on their mortgages. However, lenders say today’s ARMs are very different. Negative amortization loans, for example, no longer exist. Also, all loans must be fully documented to ensure that borrowers can pay even when the preset rates do eventually rise.

More home shoppers may be drawn to ARMs for the potential to trim their monthly payments. Some economists are predicting an increase in ARMs to continue, particularly over the next few months as mortgage rates are largely predicted to rise more.

“[Home] prices are being driven up by very tight market conditions,” says Matthew Pointon, property economist at Capital Economics. “On a per capita basis, the number of existing homes for sale is at a record low, and buyers are therefore having to up their offers to secure a home.”

Source: “Homebuyers Rush to Riskier Mortgages as Home Prices Heat Up,” CNBC (Oct. 3, 2017)