Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages

Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages

If you have a recollection of the housing crash in 2008, you might also remember the widespread popularity of adjustable-rate mortgages (ARMs) during that period. Interestingly, after a considerable period of being uncommon, there is a resurgence in the usage of ARMs among homebuyers. Let's delve into the reasons behind this trend and explore why it might not be a source of worry.

Why ARMs Have Gained Popularity More Recently

Utilizing data sourced from the Mortgage Bankers Association (MBA), the graph illustrates a rise in the proportion of adjustable-rate mortgages over the recent years.

The graph demonstrates a noticeable trend: following a period of stability at around 3% of total mortgages in 2021, a significant upswing in the adoption of adjustable-rate mortgages occurred in the subsequent year. This upturn can be attributed to a straightforward rationale: during that year, mortgage interest rates experienced a substantial surge. Faced with elevated borrowing expenses, a considerable number of homeowners opted for adjustable-rate mortgages due to their comparatively lower rates, offering a more affordable borrowing option compared to traditional mortgages.

Why Today’s ARMs Aren’t Like the Ones in 2008

To provide context, it's important to emphasize that the current iteration of adjustable-rate mortgages (ARMs) differs significantly from the ones that gained popularity leading up to the 2008 housing crash. A major contributing factor to the crash was the lax lending standards at the time. During that period, when individuals obtained ARMs, banks and lenders didn't necessitate proof of employment, assets, income, and related factors. Essentially, people were acquiring loans without meeting the necessary qualifications. This led numerous homeowners into financial turmoil as they struggled to repay loans they were never truly eligible for.

Contrastingly, the present lending standards have evolved. Financial institutions and lenders have drawn important lessons from the crash, resulting in stricter verification of income, assets, employment, and more. Consequently, contemporary homebuyers are required to meet specific criteria to qualify for their loans and demonstrate their capability to repay them.

Archana Pradhan, an Economist at CoreLogic, underscores the distinction between then and now:

"Approximately 60% of Adjustable-Rate Mortgages (ARMs) originated in 2007 were associated with low- or no-documentation loans. In a similar vein, in 2005, 29% of ARM borrowers had credit scores below 640. In the present context, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, demand comprehensive documentation, adhere to amortization schedules, and cater to borrowers with credit scores exceeding 640."

To simplify this, Laurie Goodman from the Urban Institute reiterates the point:

"Contemporary Adjustable-Rate Mortgages carry no more risk than other types of mortgage products. Additionally, their lower monthly payments could potentially enhance homeownership accessibility for a broader pool of prospective buyers."

Bottom Line

If you’re worried today’s adjustable-rate mortgages are like the ones from the housing crash, rest assured, things are different this time.

 And, if you’re a first-time homebuyer and you’d like to learn more about lending options that could help you overcome today’s affordability challenges, reach out to a trusted lender.