Adjustable-Rate Mortgages Making a Comeback

According to a new prediction from Freddie Mac, the number of homeowners with adjustable-rate mortgages (ARMs) is on the rise. According to the report, ARMs currently make up approximately 5 percent of all mortgages issued, a number that could jump to 10 percent by the end of the year.

ARMs Return After Near Elimination

Prior to the housing market crash in 2008, adjustable-rate mortgages accounted for nearly 70 percent of mortgage loans. It’s easy to see why; they all started with unbelievably low interest rates that made buying the most lavish home affordable to just about anyone.

However, millions of foreclosures later, lenders all but eliminated these types of mortgages. In 2009, they only made up about 3 percent of the market because buyers simply were not comfortable with the idea of taking on a mortgage that would eventually see an interest-rate increase.

But as Freddie Mac has reported, these mortgages are making a comeback, partially due to the fact that they’re a great bargain.

Right now, the common 5/1 ARM loan has a rate of 3.5 percent, as compared to the 5-percent rate for 30-year fixed rate mortgages. However, despite the fact they are a bargain now, is obtaining an ARM a good idea or could it result in loan default issues as it has in the past?

Is Going Back to ARMs a Good Idea?

Now that there appears to be a rise in the number of these mortgages being offered, is it a good idea to take them instead of sticking with the safe and dependable fixed-rate mortgage?

In an interview with CNN Money, Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, explained there’s a lot less danger in taking on an ARM now than there had been in the past.

He says this time around, rates won’t increase enough to cause damage to homeowners. For instance, rates for the 5/1 ARM are sitting at 3.5 percent. In a worst case scenario, the rate would stay the same for 5 years then only reach a limit of 8.5 percent. As long as the homeowner keeps the home for less than 10 years, they could actually save money with this type of loan.

There do seem to be benefits to the adjustable-rate mortgage this time around, especially if the purchase of a home is conducted as a financial strategy, but before signing on any dotted lines, it’s good to conduct significant research to make sure the ARM loan is right for you.