It looks like ARM’s (adjustable rate mortgages) are making a comeback. Before the mortgage crisis in 2008 ARM’s were very popular. Over the last 5 years, with rates dropping, there really wasn’t much demand for them. Now with rates rising, we are seeing more ARM’s. But banks say this time is different. In 2006 the average credit score on ARM mortgages was 693. In the fourth quarter of 2013 the average credit score on ARM mortgages was 762. That’s a huge difference. Gone are the subprime ARM’s. Not only are ARM’s becoming popular in the conforming market (loans at $417,000 or below), they are extremely popular in the jumbo market (loans over $417,000). During the fourth quarter of 2013 31% of mortgages between $417,000 – $1,000,000 were ARM’s.
Let me give you an examples how an ARM might be beneficial. Lets say you only plan on being in your home for 5 years. Maybe you feel you will have a new job or you might be retiring and selling your home. Whatever the case may be, you feel there is little risk in either refinancing to a 7 year ARM or buying a new home with a 7 year ARM. Currently, the 7 year ARM rate is roughly 1.125% lower than the 30 year fixed rate. On a $200,000 loan that’s $128 a month and $10,752 over 7 years. On a $400,000 loan that’s $257 a month and $21,588 over 7 years. On a $700,000 loan that’s $448 a month and $37,632 or 7 years. That’s a lot of money!
The other reason banks are saying this time is different is that it’s much harder to qualify for ARM’s now. Whereas in 2006 borrowers were being qualified at the start rate, now most ARM’s qualify the borrowers at the start rate plus 2%. Factor in the higher credit scores and banks feel the adjustables no longer carry the high risk they did prior to the mortgage crisis.
So, on your next purchase or refinance at least take a look at an adjustable. It might work perfect for you.