Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages

August 23, 2023
Carrie Hansen
Buying Myths, For Buyers, Interest Rates

If you remember the housing crash back in 2008, you may recall just how popular adjustable-rate mortgages (ARMs) were back then. And after years of being virtually nonexistent, more people are once again using ARMs when buying a home. Let’s break down why that’s happening and why this isn’t cause for concern.

Why ARMs Have Gained Popularity More Recently

This graph uses data from the Mortgage Bankers Association (MBA) to show how the percentage of adjustable-rate mortgages has increased over the past few years:

As the graph conveys, after hovering around 3% of all mortgages in 2021, many more homeowners turned to adjustable-rate mortgages again last year. There’s a simple explanation for that increase. Last year is when mortgage rates climbed dramatically. With higher borrowing costs, some homeowners decided to take out this type of loan because traditional borrowing costs were high, and an ARM gave them a lower rate.

Why Today’s ARMs Aren’t Like the Ones in 2008

To put things into perspective, let’s remember these aren’t like the ARMs that became popular leading up to 2008. Part of what caused the housing crash was loose lending standards. Back then, when a buyer got an ARM, banks and lenders didn’t require proof of their employment, assets, income, etc. Basically, people were getting loans that they shouldn’t have been awarded. This set many homeowners up for trouble because they couldn’t pay back the loans that they never had to qualify for in the first place.

This time around, lending standards are different. Banks and lenders learned from the crash, and now they verify income, assets, employment, and more. This means today’s buyers actually have to qualify for their loans and show they’ll be able to repay them.

Archana Pradhan, Economist at CoreLogic, explains the difference between then and now:

“Around 60% of Adjustable-Rate Mortgages (ARM) that were originated in 2007 were low- or no-documentation loans . . . Similarly, in 2005, 29% of ARM borrowers had credit scores below 640 . . . Currently, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, require full documentation, are amortized, and are made to borrowers with credit scores above 640.”

In simple terms, Laurie Goodman at Urban Institute helps drive this point home by saying:

“Today’s Adjustable-Rate Mortgages are no riskier than other mortgage products and their lower monthly payments could increase access to homeownership for more potential buyers.”

Bottom Line

If you’re worried today’s adjustable-rate mortgages are like the ones from the housing crash, rest assured, things are different this time.

And, if you’re a first-time homebuyer and you’d like to learn more about lending options that could help you overcome today’s affordability challenges, reach out to a trusted lender.

Carrie Hansen

Carrie loves people and numbers! Carrie has worked in financial services since she graduated from Iowa State with a degree in Finance. She enjoys connecting with new people and developing relationships to foster business and promoting other people. She is an active runner, golfer, enjoys reading, traveling, family, friends, meme sharing, comedy, anything Warren Buffett related and following the markets and investing. Carrie is happiest surrounded by family and dear friends including her boyfriend Mike and his two children most likely laughing or telling stories .

Carrie is also an adult living with Cystic Fibrosis – diagnosed when she was three months old. Cystic fibrosis is a progressive, genetic disease that causes persistent lung infections and limits the ability to breathe over time.

In people with CF, mutations in the cystic fibrosis transmembrane conductance regulator (CFTR) gene cause the CFTR protein to become dysfunctional. When the protein is not working correctly, it’s unable to help move chloride — a component of salt — to the cell surface. Without the chloride to attract water to the cell surface, the mucus in various organs becomes thick and sticky. In the lungs, the mucus clogs the airways and traps germs, like bacteria, leading to infections, inflammation, respiratory failure, and other complications. For every loan I close with Clear Mortgage, I will be donating $200 to the Cystic Fibrosis Foundation, Iowa Chapter. Reach out and apply now!