A Risky Mortgage Instrument Returns: What's Different Now
Before the 2008 financial collapse, few imagined home prices could drop nationwide. Today, a familiar financial product—adjustable-rate mortgages, or ARMs—is making a strong comeback, yet under notably different conditions.
Renewed Popularity of ARMs
ARMs, once tied to the subprime crisis, are regaining traction as buyers seek relief from high fixed interest rates. According to the Mortgage Bankers Association, ARMs made up nearly 13% of mortgage applications this fall, the highest proportion since 2008.
Borrower Motivation and Savings
Buyers are drawn to ARMs because their initial rates are typically about one percentage point lower than fixed-rate loans. A standard 5/1 ARM averages around 5.5%, while a 30-year fixed mortgage exceeds 6.3%. On a $400,000 loan, that difference can save over $200 monthly—often determining whether a buyer can afford to proceed with a purchase.
The Gamble Behind the Rate
However, ARMs involve risk. After a set period—typically five, seven, or ten years—the interest rate adjusts to current market levels.
“Every ARM, by definition, is a wager,” notes the article. “After the initial fixed period, the interest rate resets, adjusting with the broader market.”
In today’s environment, choosing an ARM effectively means betting that the Federal Reserve will reduce rates before the reset period arrives.
Author Information
Nick Lichtenberg, business editor and former Fortune executive editor of global news, authored the analysis.
Author’s Summary: Adjustable-rate mortgages are rising again as buyers chase lower payments, but with rate uncertainty looming, success depends on timing the Federal Reserve’s next move.