Rising Trend of Americans Opting for Adjustable-Rate Mortgages

Riskier Loans Gaining Popularity

Americans increasingly choose adjustable-rate mortgages (ARMs) to manage challenging housing market conditions. According to the Mortgage Bankers Association (MBA), the share of borrowers opting for ARMs was 8 percent last week, marking the highest level in five weeks. MBA senior vice president and chief economist Mike Fratantoni provided this data through their Weekly Mortgage Applications Survey.

ARMs offer fixed interest rates for a set period, which can extend up to ten years. Afterward, the rates adjust periodically based on market indices or lender-set percentages. While initially more affordable, these loans pose a risk depending on future rate changes.

Why the Shift to Riskier Loans?

Joel Berner, senior economist at Realtor.com, sees this shift toward riskier loans as indicative of eagerness to buy despite affordability barriers. Mortgages have climbed from below 6 percent to 6.71 percent since the Iran conflict began in late February, further straining affordability for buyers. Berner explains that even a slight reduction in rates can significantly impact making monthly payments.

As of the week ending September 3, Freddie Mac reported the national average for a 30-year fixed-rate mortgage at 6.71 percent, marking an increase of 0.05 percentage points from last week and 0.21 percentage points from last year. The 15-year fixed-rate mortgage averaged 6.04 percent, showing a rise of 0.44 percentage points from a year ago.

Home prices are also on the rise. Redfin’s July data shows a national median sale price of $407,730, reflecting a 3.2 percent increase from the previous year.

ARMs: A Calculated Gamble?

Amid lukewarm demand for traditional mortgages, MBA data revealed total mortgage application volume grew by only 0.8 percent compared to the previous week. ARMs offer lower initial interest rates than standard 30-year fixed loans, allowing borrowers to enjoy reduced monthly payments during the fixed-rate period.

There’s inherent risk when rates reset, potentially increasing payments. However, buyers planning to sell, relocate, or refinance before the adjustment period ends may dodge these risks, benefiting from lower initial rates.

Potential for Market Disruption

Worries loom about whether risky mortgages might trigger a housing crash like in 2008. Berner notes the risk of rate shifts affecting ARM holders but contrasts today’s market with the subprime crisis. He stresses that today’s borrowers usually possess stronger credit profiles.

The demand for riskier loans suggests buyers stretching dollars in a high-rate, inflationary climate rather than showing outright distress. Post-2008 lending rules continue to mitigate the chances of another crash.

Experts describe the current U.S. housing market as “cold.” Long-term affordability concerns and economic uncertainties from Middle Eastern conflicts have slowed demand. Yet, Berner assures that a cool market and a crashing market are distinct, with no likely crash foreseen.

Berner posits that absent unexpected events triggering mass selloffs, buyer demand should absorb excess inventory, maintaining market stability.

Consequences for ARM Borrowers

ARMs offer benefits alongside risks. Berner warns that rate increases could lead to payment delinquencies. Individual borrowers facing unaffordable adjustments might contribute to broader price softness from increased supply. Despite this, the risk of a structural market or larger economic crash remains minimal.