The rate for the mortgage he chose will stay at 3¼ percent for seven years, and then may adjust each year thereafter, based on the Libor rate. But the highest the rate could be is 8¼ percent and the lowest is 1¼ percent. Bartlett put down $350,000 in cash to get the mortgage under the conforming loan limit of $417,000 and obtained an interest rate half a point lower.
Bartlett is one of many borrowers who have considered adjustable-rate mortgages, which fell out of favor during the recession and recovery but were given a second look as the 30-year fixed rate approached 4 percent.
ARMs are considerably less than fixed-rate options. This week, the 30-year fixed rate dropped to 4.37 percent, still far above the 3.17 percent and the 2.66 percent, respectively, for the five-year and one-year adjustables.
In 2006, ARMs made up a quarter of home loan applications. Since September 2008, applications for ARMs have held a market share of only a few percentage points. But in May and June there was steady growth in ARMs to as high as 7.5 percent the week ending June 28, most recently hitting 7.2 percent the week ending July 12, according to the Mortgage Bankers Association.
The recent spike in interest rates, driven by concern about the Federal Reserve Board’s monetary policy intentions, has encouraged some borrowers to find lower rates in the ARM market, where previously they would have been happy with a 15- or 30-year fixed-rate loan, according to analysts and home mortgage experts.
“Given the significant changes in the market over the last few weeks, we’ve seen a significant uptick in the number of people who are considering and taking adjustable-rate mortgages,” said Bob Walters, chief economist at Quicken Loans in Detroit. “For most people, an ARM is a really viable product.”
You may associate ARMs with the housing crisis, because subprime adjustable-rate mortgages were the culprit in many bankruptcies and foreclosures. But the exotic products that got homeowners into trouble were often sold with insufficient or no income documentation. Moreover, the most deadly mortgages were those structured so that borrowers were repaying only interest or, worse, paying less than required to cover the mortgage interest — termed a negative amortization schedule — which left them paying interest upon their interest payments.
“It’s not ARMs that were exploding, it’s that some of the products that were engineered and the payment methodologies did put borrowers at a disadvantage. What we have in the marketplace today are more traditional adjustable-rate products,” said Keith Gumbinger, a vice president at HSH.com, a mortgage information Web site. “The most toxic ARMs have completely vanished from the market.”