The steady march of rising mortgage interest rates in 2022 priced many aspiring homebuyers out of the market. And one of those would-be homeowners may even be you. The good news is that there are other options for getting the house of your dreams. The adjustable-rate mortgages (ARMs) are the choice that appeals to the most people. However, is it true that ARMs are not the loans we have seen since 2008? Let us find out.
According to the Mortgage Bankers Association (MBA), nearly 10% of all new home loan applications were for ARMs. Although that may not seem like much, the proportion of ARM loans is still higher than it has been since 2008. And it is clear why. Homebuyers are using adjustable-rate loans to lower their payments and afford homes. This is because ARM rates are currently hovering more than 100 basis points. This is 1% below fixed mortgage rates.
Adjustable-Rate Mortgages are Less Risky Today
The media portray adjustable-rate mortgages riskier than fixed-rate mortgages. But, it is important to remember that holders of adjustable-rate mortgages are not permanently bound by their loans. It is different from how they were at the time of the Great Recession. 90% of subprime mortgages had an interest rate that could change over the course of the loan in 2006. It was just before the housing market collapse that preceded the recession. In the middle of the 2000s, some adjustable-rate mortgages had shorter fixed-rate periods. As a result, borrowers would deal with variable rates in 1 or 2 years as opposed to 5 or more. Some lenders only required borrowers to “show proof of money in their bank accounts” in order to qualify for their loans. And other lenders offered loans that “eliminated the need to prove or even to state any owned assets.”
But now, the criteria for lending is not the same. Lenders and banks have changed their practices since the crash because of what they have learned from it. This means that buyers today must actually meet the requirements for their loans and demonstrate their ability to repay them.
“Around 60% of Adjustable-Rate Mortgages (ARM) that originated in 2007 were low- or no-documentation loans. 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.” – Archana Pradhan, Economist at CoreLogic
The Bottom Line
Even if you think that ARM might be a better option than a fixed-rate mortgage, you will still need approval. It is just like with any traditional fixed-rate mortgage. But in general, ARMs are also ideal if you are looking into it as your lending option. Rest assured, things are not the same as before. If you want to learn more about your options, it is best to consult with your local expert.
What To Do:
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