What's happening with adjustable rate mortgages?


Adjustable rate mortgages have made a comeback, and it's no wonder: last week, interest rates on these loans hit a 14-year high. In the past, they helped homebuyers offset rising borrowing costs. But now, new rules have made these mortgages even safer. They now have a cap or limit on how high they can increase, and lenders have to qualify borrowers based on the future payment amount.

Last week, 30-year fixed-rate mortgage rates hit a record high of 5.3%, the highest since July 2009. In the first week of the year, the 30-year fixed mortgage averaged 3.22%. In contrast, the average 5/1 adjustable-rate mortgage (ARM) was at 3.98%. This reflects a growing trend in interest rates, but still offers borrowers substantial savings. In recent years, the average starting rate of a five-year adjustable-rate mortgage was just 4.04 percent, a reduction of more than $260 per month.

The recent rise in interest rates has also boosted the demand for ARMs, which were popular at the peak of the housing crisis. Although their reputation had suffered, ARMs have been rehabilitated. They are no longer the dangerous loans that contributed to the financial crisis. According to the Mortgage Bankers Association, ARM applications increased by more than twice as much between April 2013 and April 2014. Today, they make up nearly a quarter of new home loans.

While adjustable-rate mortgages may be a great way to buy a home, it is important to keep in mind that some of them come with prepayment penalties. These fees can amount to thousands of dollars if you opt to pay off your loan early. Be sure to ask about these fees before signing up with a lender. Once you understand how the fees work, you can make an informed decision on whether or not an ARM is the right mortgage for you.

An ARM, or adjustable rate mortgage, is an adjustable-rate loan in which your payments are based on an index. Historically, the most common index used for ARMs was the London Interbank Offered Rate (LIBOR). However, LIBOR was problematic due to price fixing and fraud. The financial sector moved away from LIBOR in favor of a more transparent and risk-free benchmark, the Secured Overnight Financing Rate (SOFR).

Last week, the average 30-year fixed-rate loan hit more than 5 percent, a level that wasn't even 3 percent a year ago. In April, the median price for a previously owned home was $391,000, up 15 percent over a year earlier. Some regions of the country had even higher median prices. This means that adjustable-rate mortgages are making a comeback. However, before getting too excited, make sure that you know what to expect.

Adjustable-rate mortgages are back due to rising interest rates. The low introductory interest rates made it easier for homebuyers to stretch their budgets. However, when these mortgages reset, many borrowers were unable to afford the increased payments and ultimately had to sell their homes. The financial crisis caused millions of Americans to become underwater on their mortgages. After the government stepped in to bail out the banks, borrowers were forced to pay higher mortgages.





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