Adjustable-rate mortgages (ARMs), an attractive option for borrowers on account of their low initial interest rates, are becoming more popular as home prices continue to rise. The share of applications for ARMs increased to 12.6% in June, marking the first time that figure had risen above 12% since 2007.
As the share of buyers opting for ARMs grows, the demographics of borrowers are changing. In contrast to prior years, when borrowers often toed the affordability line, today’s ARM borrowers are more likely to be affluent and to put down larger down payments, according to a new Zillow analysis.
ARMs act similarly to how subprime mortgages functioned during the run up to the Great Recession, though lending standards are now much higher, and today’s ARM borrowers are better positioned than borrowers overall, with higher median incomes and larger down payments. In addition, the median income of buyers who received an ARM loan was $165,000 in 2021, compared to $91,000 for all borrowers.
Key findings:
- ARMs rose in popularity during the first half of the year, bringing the share of ARM applications to its highest level in 15 years.
- Home buyers who recently financed their home purchase with an ARM typically make nearly $75,000 more than mortgage borrowers overall, and their typical down payment is more than twice as large.
- The strong financial profile of ARM borrowers in combination with the existing housing market conditions mean that these loans, alone, pose minimal risk of a housing market crash.
- Black mortgage borrowers have been more risk-averse in their use of ARMs and have not reaped the potential rewards to the same degree as borrowers of other racial groups.
The takeaway:
“Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession,” said Zillow senior economist Nicole Bachaud. “It’s important not to confuse some added risk for an individual borrower with risk to the housing market as a whole. Borrowers today are more financially prepared for home buying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road.”
Read the full report here.
