If you’re familiar with the crash in housing prices in 2008, you can recall how popular variable-rate mortgages (ARMs) were in 2008. After many years of almost non-existent, people are now returning to using ARMs when purchasing homes. Let’s look at why this is occurring and why it’s not an issue to be concerned about.
Why ARMs Have Gained Popularity More Recently
This graph employs information taken from the Mortgage Bankers Association (MBA) to illustrate how the proportion of adjustable-rate mortgages has risen over the past couple of years:
The graph reveals that after around 3% of the mortgages issued in 2021, more homeowners switched to adjustable-rate mortgages this year. There’s a clear explanation for the reason for this rise. In the last year, mortgage rates rose significantly. Due to higher costs for borrowing, homeowners chose to apply for this kind of loan, as conventional borrowing costs were expensive and ARMs gave the borrower a lower interest.
Why Today’s ARMs Aren’t Like the Ones in 2008
To put things in perspective, let’s remember that they’re not like the ARMs, which became popular in the years leading up to the 2008 financial crisis. One of the reasons for the housing market crash was the low lending guidelines. When the buyer received an ARM, lenders and banks didn’t need proof of earnings, employment, assets, etc. In reality, people were getting loans that they should not have received. Many homeowners faced problems because they needed help to pay back loans they didn’t qualify for initially.
This time, there are different lending standards. Lenders and banks have gained lessons from the recession and are now required to prove their income, assets, employment, and many more. Today’s buyers must be eligible for loans and confirm that they can repay them.
Archana Pradhan, an economist of CoreLogic, explains the differences between then and Today:
“Around 60 percent of Adjustable Rate Mortgages (ARM) in 2007 issued in 2007 were no or low-documentation loans . . . In 2005 in 2005, 29% of ARM borrower’s credit scores were below 640 . . . Today, nearly all conventional loans, which include both Fixed-Rate Mortgages and ARMs require complete documentation, are amortized and are available for borrowers who have credit scores of 640 or more. .”
In simple words, Laurie Goodman at Urban Institute helps drive this point home by stating:
“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.”
Bottom Line
If you’re worried that Today’s adjustable-rate mortgages will be like those resulting from the housing market crash, be assured that things aren’t the same this time.
If you’re a first-time homebuyer and would like to know more about loan options to aid you in meeting Today’s affordability problems, contact a reputable lender.
The housing market continues to alter and evolve as it goes, and in a dynamic market such as we’re currently in, you must have a reliable real estate agent by your side. When you’re purchasing your first house or selling yet again, finding an expert who will guide you through every stage of the process is essential.
There are indeed many different ways to conduct business in the same manner. For you to make an informed and intelligent decision when you purchase or sell a property, you require an expert in real estate who makes use of their expertise in understanding the real-time trends in house prices and supply and demand for housing supply and demand projections and many other factors to provide you with the most accurate advice. A person who can provide clarity and confidence like that is vital to your overall success. Jay Thompson, Real Estate Industry Consultant.