After several years of fixed rate mortgage popularity, consumers are once again looking at their options. Low rates and unsettling housing conditions sent most consumers to utilize fixed rates because of their stability. Now, the appeal of the adjustable rate mortgage is returning to ordinary borrowers, especially as mortgage rates have started to increase.
Although mortgage rates remain low, the records lows that were present over the past year are very slowly ebbing away. During the Great Recession and the years that followed, rates were so low that consumers opted for the certainty that fixed rates offered. The need to even consider an adjustable rate loan was gone. In addition, consumers were not pleased with the reputation that adjustable rates had gained and the instability that surrounds them.
With the increase in mortgage rates, however small it is, consumers are once again turning to adjustable rate mortgages. According to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending June 28th, activity for adjustable rate mortgage applications rose to 8% of all mortgage applications. This is the highest level reached since July of 2008.
While flexible rates are tempting, consumers who choose to use an adjustable mortgage should understand how they work before signing on the dotted line. Common phrases attached to adjustable rates are indexes, margins, caps, discounts and payments. The initial interest rate is often referred to as a “teaser rate” because it is usually exceptionally low in comparison to traditional conventional loan rates. However, it is very important to know when the rate will change and by how much that change can be. An ARM can readjust at any time, monthly, quarterly, every year or several years depending upon the terms of the loans. The percentage of the rate increase will also depend on the particular ARM contract. Due to the complex nature of adjustable rate mortgages, consumers who are interested in this form of mortgage financing must do their homework to become knowledgeable about how they work. While there may be the temptation to rely on the APR (annual percentage rate) that is quoted on the Truth in Lending Disclosure, the APR rate is not a reliable calculation of the total lifetime costs for an adjustable rate mortgage because it is not known what the rate of the future adjustments will be.
While adjustable rate mortgages can be risky, they present a great option for consumers who understand the pros and cons. For the financially savvy consumer, an ARM can be used as a savings or investment tool. For the short term homeowner who will be relocating in a few years, an adjustable rate mortgage will save them a significant amount of interest during the period of time they are in the home. All consumers who are considering an ARM must consider how much their monthly mortgage payment can increase over the life of the loan in comparison to their future income in the event that their plans suddenly change. A borrower who is financially stable can successfully use an adjustable rate mortgage.
Weighing the risk of an adjustable rate mortgage at the current time versus the future is complicated, but it is essential in order to make a fully informed decision. There are so many different types of ARMs available with each one having its own unique details regarding adjustment, the period between adjustments, the rate of adjustment and the cap on the loan.
Even though adjustable rate mortgages are becoming popular again, they are not for everyone. Consider the future when choosing a mortgage type because the future will be here in a very short time.
Rosemary Rugnetta has been writing since 2010 for Free Rate Update, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, mortgage processor, mortgage underwriter and property manager.