Why You Shouldn't Worry About the Reintroduction of Adjustable-Rate Mortgages

If you recall the 2008 housing meltdown, you may recall how popular adjustable-rate mortgages (ARMs) were at the time. And, after years of being nearly nonexistent, ARMs are becoming increasingly popular when purchasing a property. Let's look at why this is happening and why it's not a cause for alarm.

Why ARMs Have Gained Popularity More Recently

This graph uses data from the Mortgage Bankers Association (MBA) to show how the percentage of adjustable-rate mortgages has increased over the past few years:

As shown in the data, after hovering around 3% of all mortgages in 2021, many more homeowners switched back to adjustable-rate mortgages last year. That growth has a straightforward reason. Mortgage rates increased considerably last year. With rising borrowing rates, several homeowners chose this sort of loan since standard borrowing prices were high, and an ARM provided them with a lower rate. 

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

To put things into perspective, keep in mind that these aren't the ARMs that were popular in the run-up to 2008. Loose lending rules contributed to the housing meltdown. When a buyer obtained an ARM, banks and lenders did not seek verification of employment, assets, income, and so forth. Essentially, people were receiving loans that they should not have received. Many homeowners were put in jeopardy as a result of their inability to repay loans for which they were never required to qualify in the first place.

This time, lending standards are different. Banks and lenders learnt from the crash, and they now verify income, assets, employment, and other factors. This means that today's buyers must genuinely 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 simple terms, Laurie Goodman at 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.”

Bottom Line

If you're concerned that today's adjustable-rate mortgages will be similar to those used during the housing meltdown, rest assured that things are different this time.

In addition, if you're a first-time purchaser and want to learn more about lending choices that can help you overcome today's financial issues, contact a reputable lender.