With mortgage rates rising, more and more homebuyers are considering something that most probably thought out of the question: taking on an adjustable-rate mortgage (ARM) in order to make a home sooner than they otherwise could. ARMs (and the lenders who originated them) received a large portion of the blame for the housing crisis and crash in the mid-2000s, thanks to the huge population of homeowners who found themselves in foreclosure when their rates adjusted upward and they could no longer afford their monthly payments.
Today, lenders and borrowers say that ARMs are not the same “beast” that they were in the early 2000s. Instead, they say, these agreements are a friendlier version of the 30-year fixed-rate mortgage that can help buyers become homeowners in a responsible, constructive manner.
The ARMs of old were offered with a vast array of creative incentives that allegedly lured unsuspecting buyers into bad situations. Prior to the crash, these loans often could be obtained with no money down, interest-only payments, and extremely low rates that shot upward at a largely unregulated pace after a short “grace period.” Most of these incentives are now illegal, so lenders say that today’s ARM options are much better for buyers.
They require principal and interest payments, and may have fixed rates as long as 10 years. Most have a shorter period of five, however, which could create problems if ARM usage becomes extremely widespread again and results in another round of foreclosures and related losses when those fixed rates rise. At present, only about 6 percent of mortgage applications are for ARMs. By comparison, in 2006, 35 percent of applications were made for these mortgages.
In December, the 30-year fixed rate on a mortgage was 4.16 percent, compared to 3.19 percent on a five-year ARM. Executive vice president of corporate strategy at Ellie Mae, Joe Tyrrell, predicted that as the gap in rates continues to widen, ARMs will once again grow in popularity, particularly if the terms of these loans become more flexible.
Since about nine of every 10 homeowners refinance or exit their original mortgage within nine years of purchasing their home anyway, it seems likely that lenders and regulators will find a way to work together to make this loan product increasingly accessible. The results of this could take as much as a decade to manifest, be they positive or negative.
You can get more of Carole VanSickle Ellis’ coverage of this topic and others online at www.sdiradio.com.
About the Author
Carole VanSickle Ellis is the host of Real Estate Investing Today, a daily nine-minute investing podcast, and the editor of the Bryan Ellis Investing Letter. Contact her at editor@bryanellis.com or visit www.investing.bryanellis.com.
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