Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages.

If you remember the housing crash back in 2008, you may recall just how popular adjustable-rate mortgages (ARMs) were back then. After years of being virtually nonexistent, more people again use ARMs when buying homes. Let’s explain why that’s happening and why this isn’t cause for concern.

Why ARMs Have Gained Popularity More Recently

This graph uses data from the Mortgage Bankers Association (MBA) to show how the percentage of adjustable-rate mortgages has increased over the past few years:

Percent of ARMs Increased Since 2021 - Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages. - KM Realty Group LLC, Chicago

As the graph conveys, after hovering around 3% of all mortgages in 2021, many more homeowners returned to adjustable-rate mortgages last year. There’s a simple explanation for that increase. Last year, mortgage rates climbed dramatically. With higher borrowing costs, some homeowners decided to take out this type of loan because traditional borrowing costs were high, and an ARM gave them a lower rate. 

Why Today’s ARMs Aren’t Like the Ones in 2008

To put things into perspective, let’s remember these aren’t like the ARMs that became popular in 2008. Part of what caused the housing crash was loose lending standards. When a buyer got an ARM back then, banks and lenders didn’t require proof of their employment, assets, income, etc. People were getting loans that they shouldn’t have been awarded. This set many homeowners up for trouble because they couldn’t repay the loans they never had to qualify for in the first place.

This time around, lending standards are different. Banks and lenders learned from the crash, and now they verify income, assets, employment, and more. This means today’s buyers have to qualify for their loans and how they’ll be able to repay them.

Archana Pradhan, Economist at CoreLogicexplains the difference between then and now:

“Around 60% of Adjustable-Rate Mortgages (ARM) that were originated in 2007 were low- or no-documentation loans . . . Similarly, in 2005, 29% of ARM borrowers had credit scores below 640 . . . Currently, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, require full documentation, are amortized, and are made to borrowers with credit scores above 640.”

In simple terms, Laurie Goodman at Urban Institute helps drive this point home by saying:

“Today’s Adjustable-Rate Mortgages are no riskier than other mortgage products and their lower monthly payments could increase access to homeownership for more potential buyers.”

Bottom Line

If you’re worried that today’s adjustable-rate mortgages are like the ones from the housing crash, rest assured, things are different now.

If you’re a first-time homebuyer and want to learn more about lending options that could help you overcome today’s affordability challenges, reach out to our Chicago real estate insiders at KM Realty Group LLC.