Do ARMs Still Spook Borrowers?
July 11, 2018
As mortgage rates rise, borrowers may be more likely to consider an adjustable rate mortgage, but ARMs’ sour reputation from the housing crisis may prevent them from taking one.
ARMs tend to offer lower introductory rates for a set period of time, such as five or seven years, before resetting higher. Even a decade after the financial crisis, ARMs, which took a lot of blame for rising defaults back then, are still relatively low.
The share of all mortgage applications with floating rates from ARMs was at 6 percent in early June, according to the Mortgage Bankers Association. In the 10 years prior to 2008, ARMs averaged 20 percent in the marketplace.
Sam Khater, Freddie Mac’s chief economist, told MarketWatch that he doesn’t think ARMs will budge much more, even as mortgage rates inch up. Khater says there will need to be a larger gap between the long-term interest rates and short-term rates to motivate borrowers to take on an ARM.
Some economists believe ARMs will tick up, slightly at least. “I do believe we’ll see more ARMs,” Rick Sharga, executive vice president for Carrington Mortgage Holdings, told MarketWatch. “But I don’t believe we’ll see them issued like in the last housing boom.”
Sharga says that ARMs can be useful for borrowers who don’t intend to stay in their homes long and who intend to move out before the interest rates reset.
“Americans Are Still Shunning Adjustable-Rate Mortgages 10 Years After the Crisis,” MarketWatch (July 10, 2018)
Updated: August 20, 2018