According to a recent report by the Mortgage Bankers Association, demand for adjustable rate mortgages (also known as ARMs) has doubled over the past three months, making up 9% of all new mortgage applications. This comes at a time when the number of people seeking mortgages overall has fallen, and when interest rates are rising. Some fear this could be the sign of the market cooling in the near future, which may result in prices starting to fall.
What Are Adjustable Rate Mortgages?
Adjustable rate mortgages, also known as ARMs for short, are a type of mortgage with an interest rate that may change over time. When an ARM is first issued, the interest rate is usually locked in for an initial period of three, five, or ten years, depending on the terms of the mortgage. However, once that initial period is over, the interest rate on the mortgage can be adjusted by the lender, depending on market conditions at the time. This is in contrast to more traditional fixed rate mortgages, where the interest rate is set when the mortgage is issued, and it does not change as time goes on.
What Makes ARMs Appealing to Some People?
The primary appeal of ARMs is that, at least initially, they offer a lower interest rate than more traditional fixed rate mortgages. This means that getting an ARM is often a bit easier on the bank accounts of people looking to buy a house, and can make it more manageable to pay off an ARM than it would a fixed rate mortgage, at least initially. They also tend to be easier to get generally, with less restrictive credit requirements than for fixed rate mortgages.
Why Are ARMs Increasing in Popularity?
The two major reasons that more people are applying for ARMs are increasing interest rates, and rising home prices. A lack of available inventory has driven up demand for the homes that are available, increasing their price. At the same time, interest rates are on the rise, making it more expensive to get a loan. ARMs offer a potentially cheaper alternative that can help people still afford a mortgage, despite these factors.
Should You Consider an ARM?
Ultimately, ARMs are not for everyone. However, for some people, ARMs can allow them access to homeownership when a traditional fixed rate mortgage would not. You should discuss the possible pros and cons of an adjustable rate mortgage with your mortgage lender or real estate attorney, who can help you understand what that may mean for you.
At Liongate Homebuyers, we assist our clients with a variety of services related to buying and selling real estate. We have experience handling real estate financing, especially for developers and house flippers. For more information, please contact us at 516-548-6553, or visit our contact page.
