Are Buyers Using Adjustable Mortgages Responsibly?

February 5, 2019

Borrowers applying for adjustable-rate mortgages are asking for much larger loan amounts, raising concerns among housing analysts that ARMs are being used haphazardly—just as they were during the prerecession housing bubble more than a decade ago.

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The average size of an adjustable-rate mortgage increased to $688,400 last week, more than double the average fixed-rate mortgage—which is $280,900—according to the Mortgage Bankers Association. Experts say borrowers are attracted to ARMs for their lower introductory rates, but once they reset to market value after five or seven years, homeowners may no longer be able to afford them.

Last week, the average rate for a five-year ARM was 3.96 percent compared to 4.46 percent for a 30-year fixed-rate mortgage, according to Freddie Mac. The share of ARMs has been increasing, particularly in expensive markets. Economists are quick to point out that ARMs today are very different from the 2008 bubble-and-bust era. MBA Chief Economist Mike Fratantoni told MarketWatch that ARMs typically carry larger balances than fixed-rate mortgages because they help those struggling to afford an expensive home. “I think there is still a desire to use the product which is going to get you into the home, and then there may be an opportunity to refinance into a fixed-rate mortgage later,” Fratantoni says. Higher-income borrowers also may be more tolerant of the financial risks of ARMs, he adds.

But the abuse of ARMs isn’t likely to occur like it did a decade ago, some economists say. Lenders are much more strict about issuing ARMs today than they were years ago, Fratantoni says. Lenders now verify that borrowers can afford any monthly payment during the life of the loan, even if the rate resets.