According to the Mortgage Bankers Association, demands for adjustable-rate mortgages, or ARMs, hit a 14-year high last week. As interest rates rise, homebuyers begin to seek cheaper options to cope with soaring borrowing costs.
But with interest rates rising, will these mortgages become a problem again as they did in the real estate collapse before the Great Recession? According to the experts, it is impossible because these loans are more stringent than the previous ones, but they may still not be suitable for everyone.
According to some experts, as it was very easy to get a mortgage before, some borrowers would lie about their income and usually got mortgages easily. But today, it becomes more and more stringent.
According to Freddie Mac., rates on 30-year fixed mortgages reached 5.3% last week, the highest level since July 2009 and up from 3.22% in the first week of the year. 30-year fixed mortgages are by far the most popular loans for home purchases.
Historically, ARMs have been an attractive alternative for borrowers looking for a lower initial rate when compared to the traditional fixed-rate mortgages.
Unlike a traditional mortgage, which has a fixed interest rate for the entire loan term, an ARM payment can fluctuate over time. The interest rate resets after the previously agreed-upon term and will reflect the current interest rate conditions, resulting in higher or lower monthly payments.
Today's ARMs are different from those in 2008 in that they are more tightly regulated. The newer regulations cap rate adjustments, which limit percentage increases per period and over the life of the loan, minimizing the risk of payment shock that homebuyers may experience. Credit and income standards have also become more stringent, allowing lenders to verify that an ARM will be an affordable long-term solution for borrowers.
With mortgage rates reaching 5%, more and more potential buyers gravitate toward adjustable-rate mortgages. According to the Mortgage Bankers Association, the ARM share is three times higher than in early 2022.
Who should get an ARM?
If borrowers are looking for a lower rate, an adjustable-rate mortgage can be a good opportunity to get a break on their monthly payment – but it won’t last.
According to some experts, first-time buyers can take advantage of the low-interest rates of the ARM during the fixed period before they trade up. But before taking any action, borrowers considering an adjustable-rate mortgage should really do their homework and use an amortization calculator to check how their mortgage payments may fluctuate over six years and whether they can afford to pay.
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