If you remember the housing crash back in 2008, you may recall just how popular adjustable-rate mortgages (ARMs) were back then. And, after years of being virtually nonexistent, more people are once again using ARMs when buying a home. Let’s break down why that’s happening and why you don’t need to fear the return of adjustable-rate mortgages.
Why ARMs Have Gained Popularity More Recently
As the graph shows, after hovering around 3% of all mortgages in 2021, many more homeowners turned to adjustable-rate mortgages again in the last year. There’s a simple explanation for that increase: Last year is when mortgage rates climbed precipitously. And, with higher borrowing costs, some homeowners decided it was wise to take out this type of loan because traditional borrowing costs were high, and an ARM gave them access to a lower rate.
Why Today’s ARMs Aren’t Like the Ones in 2008
To put things into perspective, let’s remember that today’s ARMs aren’t like the ones that became popular leading up to the 2008 housing crisis. Part of what caused the housing crash was loose lending standards. Back then, when a buyer got an ARM, banks and lenders didn’t require proof of their employment, assets, income, etc. Simply put, people were getting loans that they shouldn’t have been awarded because they really weren’t qualified for. This set many homeowners up for trouble because they couldn’t pay back the loans that they never had to qualify for in the first place.
This time around, lending standards are very different. Banks and lenders learned from the crash, and now they verify income, assets, employment, and more. This means that today’s buyers have to actually qualify for their loans and demonstrate their ability to repay them.
Archana Pradhan, Economist at CoreLogic, explains 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 more direct terms, Laurie Goodman at the 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.”
If you’re worried today’s adjustable-rate mortgages are like the ones from the housing crash, rest assured, things are different this time. Thanks to stricter lending standards that insist that all borrowers are qualified for their loans you don’t need to fear the return of adjustable-rate mortgages. In fact, an ARM could be exactly the financial vehicle that you need to get into your new home today.
At Bay Shores Real Estate we will not only find your next home we’ll hold your hand through the entire purchase process as well as connect you with one of the many trusted lenders we know who can educate you about lending options that could help you overcome today’s affordability challenges. So, if you’re ready to find your next home, let’s connect and get you on your way.