Adjustable rate mortgages were all the rage during the housing boom, making up almost 70 percent of all mortgages issued during those years, but their popularity tanked with the financial crash. In 2009, they made up just 3 percent of new U.S. home loans. However, ARM loans are gradually creeping back into the market and may even take a significant market share by the end of the year.
According to mortgage finance company Freddie Mac, ARM loans account for 5 percent of all new mortgages, with a likely increase to 10 percent by December. And while some may be alarmed by the reemergence of these variable rate loans, it may actually be a signal of greater market confidence.
Many people associate ARM loans with the failure of the housing market, especially as thousands of homeowners defaulted on such loans once the rates started resetting. It is true that the majority of defaults were on ARM loans, but it is also true that many loans were made to borrowers who neither had the credit to sustain a mortgage nor could afford the house they’d bought.
Apparently, an ARM loan can actually be the best choice if you plan to move within about 7 years after your purchase. One of the most common is the 5/1 ARM, one that offers a low introductory rate for 5 years before adjusting annually thereafter. For someone not planning to stay long, the savings could be great – right now rates on 5/1 ARMs are at 3.5 percent, compared with 5 percent on 30-year fixed rate mortgages.
“For anyone with a high likelihood of moving soon, the 5/1 is a great product,” said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, as quote in a CNN Money.com article. “It’s a well understood product too; there’s not a lot of danger with it.”
So in one sense, the fact that these 5/1 ARMs are on the rise may suggest that more buyers are buying for the short term, having faith that they will be able to sell with equity within a few years. And if that is a sign of greater confidence in the housing market, we’ll take it!