A Risky Mortgage Instrument Is Rising Again, But Conditions Differ
Before the 2008 financial crash, the idea of falling home prices seemed impossible to many in the market. Today, adjustable-rate mortgages (ARMs), a risky loan type linked to that crisis, are gaining popularity, but with key differences.
The Resurgence of Adjustable-Rate Mortgages
ARMs, once blamed for exacerbating the subprime meltdown, have seen a sharp increase in use. According to the Mortgage Bankers Association, ARMs made up nearly 13% of all mortgage applications this fall—the highest rate since 2008.
Why Buyers Choose ARMs Now
- ARMs offer initial interest rates about 1% lower than comparable fixed-rate mortgages.
- The typical 5/1 ARM rate is in the mid-5% range versus 6.3% or higher for a 30-year fixed loan.
- This initial savings can mean $200 or more per month on a $400,000 loan.
- Such savings persuade first-time buyers or those upgrading to larger homes.
The Inherent Risk
By design, ARMs come with uncertainty. After the fixed introductory period—usually 5, 7, or 10 years—the interest rate resets based on market conditions.
Today, buyers are betting the Federal Reserve will cut interest rates before their loan adjusts.
Author’s Summary
Adjustable-rate mortgages are becoming popular again due to lower initial rates, but borrowers now face different risks amid shifting Federal Reserve policies.
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