A Risky Mortgage Instrument on the Rise
Adjustable-rate mortgages (ARMs), once blamed for the subprime crisis, are gaining popularity again as homebuyers seek savings amid high interest rates. The share of ARMs reached nearly 13% of all mortgage applications this fall, the highest since 2008, according to the Mortgage Bankers Association.
Why ARMs Attract Buyers Today
ARMs offer starting interest rates about one percentage point lower than fixed-rate loans, creating significant monthly savings. For example, the typical 5/1 ARM has mid-5% rates, compared to 6.3% and higher for a 30-year fixed mortgage. On a $400,000 loan, this can mean over $200 in monthly savings—a crucial factor for first-time buyers or those upgrading.
The Inherent Risk of ARMs
Every ARM carries risk because after the initial fixed period—often five, seven, or ten years—the interest rate resets based on market conditions. Buyers are betting that the Federal Reserve will cut rates before their loan adjusts.
"Before the crash of 2008, a decline in home prices was inconceivable to the market." — Nick Lichtenberg, business editor and former executive editor of global news at Fortune.
Unlike the pre-2008 era, today's rising use of ARMs comes with different economic assumptions and potential risks related to federal rate hikes rather than falling home prices.
Summary: Adjustable-rate mortgages are resurging as attractive options for buyers facing high rates, but their success depends on future interest rate movements and carries inherent financial risk.
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