LOS ANGELES (AP) — Rising interest rates are making variable-rate mortgages an increasingly attractive alternative to 30-year fixed-rate home loans. ARMs accounted for 13% of all home loans by dollar volume in March, their highest share since January 2020, according to CoreLogic.
This increase coincides with a sharp rise in mortgage rates. The average weekly rate on a 30-year mortgage slipped this week to 5.25% from 5.3% last week, which was the highest level since 2009, according to mortgage buyer Freddie Mac. The average rate was 3% a year ago. Rising mortgage rates, combined with soaring house prices, are making home ownership less affordable.
“It’s natural for homebuyers to look for ways to lower that mortgage payment, and one way is through a variable rate mortgage,” said Selma Hepp, deputy chief economist at CoreLogic.
Variable rate mortgages don’t make it easier to qualify for financing, but they do give homebuyers some flexibility with their monthly mortgage payments in the early years of the loan term.
For example, a homebuyer who takes out a typical 5/1 ARM will have a low fixed rate for the first five years of the loan. After that, the loan adjusts at an adjustable interest rate, which can be higher or lower, until the debt is paid off or the buyer refinances the loan. These loans have become less attractive over the past two years as average long-term mortgage rates have fallen to historic lows.
The share of ARMs in all loans by dollar value fell to just 4% in January 2021, from 13% a year earlier, according to CoreLogic. ARMs have represented between 10% and 19% of all dollar loans over the past 12 years.
At the height of the last housing boom in 2005, ARMs accounted for just under 45%, CoreLogic said.
At the time, these home loans were more common because lenders could sign up homebuyers for a loan and then take it off their balance sheets by selling it to investment banks who sold mortgage-backed securities to investors. . Much looser lending criteria also put many loans in default when they adjusted to a higher rate.
Such a scenario, however, is not on the cards now, as banks have tightened their lending standards since the Great Recession.
“We continue to see very strong underwriting standards,” Hepp said. “The past few years have been some of the best mortgages taken out of any type of mortgage people use.”
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