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September 23, 2014

Good or Bad? ARMs Make a Comeback

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Good or Bad? ARMs Make a Comeback

Mortgage rates recently soared to a two-year high, prompting more borrowers to take a closer look at adjustable rate mortgages. 

Thirty-year fixed-rate mortgages have moved from below 3.5 percent as of late April to above 4.5 percent recently, increasing monthly payments for new home buyers. Meanwhile, ARM rates have stayed relatively steady in recent weeks between 2.7 percent and 3.1 percent, according to Bankrate. 

Adjustable-rate mortgages are often blamed for the housing bubble, luring buyers with their low introductory rates that later rise. Some home owners were not able to afford the higher reset payments and defaulted on their loans. In recent years, fixed-rate mortgages have been at record lows, making ARMs a less common option for borrowers. 

However, “with the ongoing run up in fixed mortgage rates, adjustable-rate mortgages are becoming more popular among home owners looking to refinance and for home owners,” says Frank Nothaft, Freddie Mac’s chief economist.

Earlier this month, the share of adjustable-rate mortgage activity soared to its highest level since July 2008, the Mortgage Bankers Association reported. 

Borrowers who get a lower rate ARM may be able to spend more for a house they want than getting a higher rate with a fixed-rate mortgage. But the variable interest rate may get a borrower in trouble later on if their monthly payments rise too much. 

ARMs are based on short-term interest rates and those are still near record lows despite the increases on other rates. However, economists say they believe short-term rates will soon increase as well. 

Source: “Risky Adjustable-Rate Mortgages Are Starting to Make a Big Comeback,” Daily Finance (July 10, 2013)

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