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Why You Don’t Need To Fear the Return of Adjustable-Rate Mortgages
Where Are People Moving Today and Why?
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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.”
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.
📈 If you remember the housing crash back in 2008, you may recall just how popular adjustable-rate mortgages (ARMs) were back then.
📦 Plenty of people are still moving these days. And if you’re thinking of making a move yourself, you may be considering the inventory and affordability challenges in the housing market…
While this isn’t the frenzied market we saw in recent years, homes that are priced right are still selling quickly and seeing multiple offers right now.
If you’re thinking of buying or selling a home, one of the biggest questions you have right now is probably: what’s happening with home prices?
👩🏽💻 Even as some companies transition back into the office, remote work remains a popular choice for many professionals. So, if you currently enjoy working from home or hope to be able to soon, you’re not alone.
🏡 The current housing market is generally favorable to sellers due to today’s limited housing supply, there are still factors that can cause delays or even prevent a house from selling.
📈 If you’re thinking about buying a home, you should know your credit score’s a critical piece of the puzzle when it comes to qualifying for a home loan.
📈 During the fourth quarter of last year, many housing experts predicted home prices were going to crash this year. Here are a few of those forecasts: