If you remember the housing crash in 2008, you may recall how popular adjustable-rate mortgages (ARMs) were back then. After years of being virtually nonexistent, more people are once again using ARMs when buying a home.
Why ARMs Have Gained Popularity Recently
As the graph conveys, after hovering around 3% of all mortgages in 2021, many homeowners turned to adjustable-rate mortgages again last year. The simple explanation is mortgage rates climbed dramatically. An ARM allows a buyer to buy now at a lower rate. Then if rates for conventional long-term mortgages drop as almost all experts are predicting, they can refinance to a lower long-term rate. In fact, many lenders are offering to refinance for free within two years.
Why Today’s ARMs Aren’t Like the Ones in 2008
Today’s ARMs aren’t like the ones that became popular leading up to 2008. Part of what caused the housing crash was loose lending standards. When a buyer got an ARM, banks and lenders didn’t require proof of employment, assets, income, etc. Around 60% of ARMs originated in 2007 were low- or no-documentation loans. Similarly, in 2005, 29% of ARM borrowers had credit scores below 640. This set many homeowners up for trouble because as rates adjusted, they couldn’t pay back the loans they never should have been given in the first place.
This time around, lending standards are different. Banks and lenders learned from the crash and now verify income, assets, employment, and more. This means today’s buyers actually have to qualify for their loans and show they’ll be able to repay them. Currently, almost all 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, today’s ARMs are no riskier than other mortgage products and their lower monthly payments can increase access to homeownership for more potential buyers.