Adjustable Rate Mortgages Are Back

• Author: William Asher
• Posted: 2024-08-24

It seems that adjustable-rate mortgages are back! While they gained a bad reputation during the housing crisis, these loans are back. Their low introductory rates encouraged home buyers to stretch their budgets. However, when the loans reset, many borrowers simply couldn't afford the higher principal payments. In the wake of the financial crisis, many homeowners fell underwater on their mortgages, leading them to sell their homes. But now, with interest rates and home prices back up, many borrowers are opting for the riskier adjustable loan.

While adjustable-rate mortgages were once frowned upon due to their high interest rates, these loans have returned. Many of these mortgages offer low introductory rates, but these rates may increase in the future. That's a huge risk, especially for first-time homebuyers. This is why adjustable-rate mortgages are riskier than fixed-rate mortgages. Furthermore, they adjust every five to ten years. However, the adjustment rates are limited to two percentage points per year.

While adjustable-rate mortgages are not for everyone, they are still an affordable way to finance your first home. But be sure to choose your loan carefully. An ARM may not be the best option for you if you plan to stay in your house for a decade or more. Despite the risks, today's borrowers can still afford a home even with an adjustable-rate loan. This type of mortgage was popular before the housing crisis, and a third of the mortgage market was comprised of ARMs. Although this is a riskier mortgage product, borrowers can realize significant savings.

When an ARM is readjusted, the mortgage rate increases or decreases based on a predetermined index rate. The index may be the prime rate or the Cost of Funds Index. The new rate is then added to the index and adjusted accordingly, according to the change in the index. In the case of an ARM, the index rate may increase or decrease depending on how the market changes. While the risk involved is lower with a fixed-rate mortgage, a variable-rate loan may increase or decrease.

Adjustable-rate mortgages are back in fashion, but they're not what they were before. According to the Mortgage Bankers Association, 10.8% of all mortgage applications were for ARMs in the first quarter of this year. The new regulations, which protect borrowers from unnecessary risks, are making ARMs popular again. The ARM market is being fuelled by well qualified home buyers. The current economic climate has made fixed-rate mortgages more affordable, but they've also posed some risks.

Some banks have started offering deferred interest loans. This new type of loan is a popular option for first-time home buyers. However, borrowers should be aware of the negative consequences of negative amortization. The balance of a negative-interest loan can balloon to as much as 125% of the original loan amount. Axos Bank is introducing a new deferred-interest loan, which allows borrowers to delay paying down their principal.