What Advantages Do Adjustable-Rate Mortgages Offer vs. Fixed-Rate Mortgages During Times of Increased Inflation?
With mortgage rates on the rise, more Americans are opting for adjustable-rate mortgages over 30-year, fixed-rate loans as a way of saving money in a period of high inflation. But the strategy could backfire, depending on the terms and the length.
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ARMs accounted for 13% of all home loans by dollar volume in March — their highest percentage since January 2020, ABC News reported, citing data from CoreLogic. At the same time, the average weekly rate on a 30-year mortgage recently reached a 13-year high of 5.3%, according to Freddie Mac. That was up from 3% a year ago.
The rise in ARMs has continued over the past couple of months, said Robert Heck, vice president of mortgage with Morty, a mortgage services platform.
“We’ve seen a noticeable uptick in demand for adjustable-rate mortgages amid increasing rates for fixed-rate loans,” Heck told GOBankingRates in an email statement. “The appeal of an ARM is that they offer lower initial interest rates than fixed-rate mortgages, but they certainly aren’t right for everyone.”
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Lower rates mean lower monthly payments — a big draw in an economy where the prices of consumer goods are rising at their highest rate in more than 40 years.
As GOBankingRates previously reported, the intitial interest on an ARM is locked in below the market rate for a period of one, five, seven or 10 years. But the low initial rate, also called the “teaser rate,” doesn’t last forever.
Once the rate starts adjusting, your payment can change based on the market rates at the time, which are impossible to predict when the loan is signed. Adjustments could bring lower rates, but you also run the risk of facing much higher monthly payments each time the loan resets.
Another challenge with ARMs is finding one to begin with. As ABC News noted, ARMs’ share of all loans by dollar value fell to only 4% in January 2021 from 13% the previous year. ARMs have made up 10% to 19% of all loans by dollar value over the last 12 years. Compare that to the height of the last housing boom in 2005, when ARMs represented almost 45%, according to CoreLogic.
“For consumers, ARMs are generally less available than fixed-rate options as not all lenders offer them,” Heck said. “On the secondary market, there is both less investor appetite and less liquidity for ARMs, the combination of which has contributed to ARMs being less competitive than their fixed-rate counterparts since 2008.”
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This article originally appeared on GOBankingRates.com: What Advantages Do Adjustable-Rate Mortgages Offer vs. Fixed-Rate Mortgages During Times of Increased Inflation?
