More buyers reaching for ARMs in high-priced markets
SAN FRANCISCO – Nov. 19, 2018 – As mortgage rates rise, more buyers in expensive metros are turning to adjustable-rate mortgages (ARMs) to curb costs.
But the potential savings between a fixed-rate mortgage and an adjustable-rate mortgage is narrowing. The average rate on the 30-year fixed-rate mortgage and 5/1 adjustable-rate mortgage have both jumped by about 70 basis points from August 2017 to August 2018, according to Freddie Mac. ARMs, however, still do typically offer a slightly lower initial interest rate that then rises after a set period, such as five or seven years.
ARMs are more common in expensive metros and among homebuyers borrowing larger balances on their mortgage loans, according to CoreLogic, a real estate data firm.
"As ARMs have a lower initial interest rate than [fixed-rate mortgages], buyers see bigger monthly savings in the initial payment, especially for bigger loans," CoreLogic notes on its Insights blog.
For example, the ARM share is highest in metros like San Jose, which had the highest average sales price. San Jose had the largest share of ARMs in 2018, according to CoreLogic.
ARMs accounted for 51 percent of the dollar volume among mortgages of more than $1 million that were originated during August 2018. Among mortgages in the $400,001 to $1 million range, the ARM share was about 21 percent; in the $200,001 to $400,000 range, ARMs accounted for just 7 percent of the mortgages.
As of August 2018, ARMs comprised about 15 percent of the dollar volume of conventional single-family mortgage originations. The ARM share has remained relatively stable since 2010 but has risen in some geographic areas and at certain higher price points.
ARMs earned a bad reputation during the housing crash when homeowners faced resets from their initial interest rate and could no longer afford their monthly payments. In mid-2005, the ARM share was more than 50 percent but then dropped to a low 4 percent in early 2009.
Stricter underwriting requirements from lenders in recent years may have discouraged ARM volume from taking off again, CoreLogic notes.
Source: "Are Adjustable-Rate Mortgages More Popular as Mortgage Rates Rise?" CoreLogic Insights Blog (Nov. 14, 2018)
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