Adjustable Rate Mortgages Are Making a Comeback and Here Is Why More Buyers Are Choosing Them Now

The Loan Product That Is Quietly Gaining Ground in the Current Market

Adjustable-rate mortgages are making a comeback and the data shows it. ARMs recently rose to approximately 8.6 percent of all mortgage applications which reflects a meaningful and growing segment of buyers who have done the math and concluded that the ARM is the right tool for their specific situation right now.

Understanding why that is happening and whether it applies to your situation is worth a few minutes of your time.

The Rate Differential That Is Driving the Trend

The average ARM rate has been running noticeably below the 30-year fixed rate recently coming in closer to the high 5 percent range while 30-year fixed rates have been sitting considerably higher. That gap between the ARM starting rate and the fixed rate is the core of why more buyers are choosing ARMs right now.

The monthly payment difference between a loan at a rate in the high 5s versus a rate in the mid to high 6s is real and meaningful on any typical purchase price. On a $400,000 loan that rate differential can translate to $200 or more in monthly savings during the fixed period of the ARM. Over several years that adds up to a significant sum of money that stays in the buyer's budget rather than going to the lender in additional interest.

Who the ARM Strategy Works Best For

As Brian Faeth explains the buyers who are getting the most value from ARM products right now are the ones who are going in fully informed about exactly when and how the rate can adjust and who have a specific plan for what happens before that adjustment occurs.

If you plan to move within five to seven years the fixed period of a 5-year or 7-year ARM may cover your entire ownership timeline. You capture years of lower payments and never experience a rate adjustment because you have sold or refinanced before the fixed period ends. The lower starting rate delivers real monthly savings throughout the period you actually hold the loan.

If you anticipate refinancing when rates improve the ARM gives you a lower payment in the interim period while you wait for the rate environment to shift. Rather than locking in today's higher fixed rate for thirty years you take the lower ARM rate for the near term and position yourself to refinance into a fixed rate when the market offers better conditions.

If you are planning to make significant principal reductions during the fixed period reducing the outstanding balance decreases the impact of any future rate adjustment on your monthly payment making the ARM more manageable even if you end up holding it through the adjustment.

What Going in Fully Informed Actually Means

The key phrase Brian Faeth emphasizes is going in fully informed. An ARM that is chosen because it produces the lowest payment today without a clear understanding of when the rate adjusts and what the realistic future payment scenarios look like is a different and more risky decision than an ARM chosen with complete information and a specific plan.

Know your adjustment date. Know the caps that limit how much your rate can increase at each adjustment and over the life of the loan. Know what your payment looks like at the first adjustment under current market conditions and what it could look like in a worst-case scenario under the applicable caps. That complete picture is what allows you to evaluate whether the ARM is genuinely the right fit for your situation or whether the lower payment is creating a false sense of affordability.

Used the right way with full information and a clear plan an ARM is a powerful path to a more comfortable payment today in a rate environment where every basis point of savings matters.

Brian Faeth works with buyers to evaluate ARM versus fixed-rate options with complete transparency about the numbers and realistic scenarios so that the loan chosen is genuinely the right fit for each buyer's goals and timeline. Follow along for more loan tips and solutions for the current market and reach out to Brian Faeth to find out whether an ARM makes sense for your specific situation right now.

Sources

MortgageNewsDaily.com
FannieMae.com
ConsumerFinancialProtectionBureau.gov
Investopedia.com
BankRate.com