Adjustable-rate mortgages, which all but vanished during the housing bust, are again gaining popularity. Home prices and interest rates rose last year, and adjustable mortgages can help keep the monthly payment affordable — at least temporarily. Such mortgages offer a lower initial rate, but that rate can rise over time with market changes.
More homeowners in Southern California were willing to take that risk last year. In November, 11.2% of homes bought with loans carried adjustable-rate mortgages, or ARMs. That’s double the rate of the same month a year earlier, according to San Diego-based research firm DataQuick.
With interest rates expected to rise this year, the proportion of ARMs could increase further.
“Generally, as rates increase ARMs become more popular,” said Guy D. Cecala, publisher of Inside Mortgage Finance.
Last week, lenders offered, on average, a 3% interest rate for a 5/1-year ARM — which means a borrower receives that rate for five years, before the loan starts to adjust annually with the market. That’s compared with 4.48% for a 30-year fixed loan, according to mortgage giant Freddie Mac.
Mortgage brokers say borrowers who plan to move after a few years, or those with considerable, but irregular, income could be well-suited for an ARM.
Largely gone are option ARMs and loans with very low “teaser” rates that quickly exploded into payments that borrowers couldn’t afford. Lenders during the bubble years also qualified borrowers based on teaser rates, increasing the likelihood of default.
New federal regulations taking effect this month should further curtail some of the riskier ARMs, including interest-only products and those with balloon payments.
Of course, rates could adjust downward in favorable market conditions. But ARMs are still riskier than fixed-rate loans — especially when rates remain at historical lows but are expected to rise.
Source: LA TIMES