As numbers for fixed-rate loans climb, interest stirs again in adjustable rate mortgages


The recent run-up in 30- and 15-year fixed loan rates has sparked more inquiries into adjustables, or ARMs, because these loans generally offer lower rates at first. That may translate to savings upfront.

But is an ARM right for you, given what happened in the previous housing boom and bust? Many consumers link such mortgages to the housing crash because subprime adjustable-rate mortgages were the culprit in many bankruptcies and foreclosures.




“They’re complicated,” said Michael Lea, real estate professor at SDSU’s Corky McMillin Center for Real Estate, referring to ARMs. “And someone who has been around the block before, has some financial assets and can withstand potential payment changes are the logical users of adjustables.”

Then and now


At that time, mortgage firms routinely gave out loans to would-be homebuyers after little or no review of employment or ability to pay.


“These were the extreme examples of adjustables,” said Lea.





Hybrid mortgages offer a fixed rate for a certain period of time before it adjusts, typically moving up. For example, a 5/1 adjustable-rate hybrid would mean the rate is fixed for the first five years of the loan and then will adjust every year until the loan is paid off.

Unlike adjustables of the past, today’s ARMs require consumers to prove they can afford their mortgage payments. Applicants must provide an extensive list of paperwork, including pay stubs, tax records and credit reports.

Lenders want “every piece of paper you’ve ever touched,” Scruggs said.

The future of ARMs

It’s unlikely that riskier adjustable-rate products will make a comeback, in light of the federal government’s push for more mortgage regulation.

One future rule would prevent mortgage lenders from using lower introductory rates to qualify borrowers. Lenders would instead have to use a higher fully-indexed rate, which could mean less people would get adjustables.

Such changes, brought on by the Dodd-Frank Act, are expected to go into effect next year.

The result could be a mortgage market that offers fewer and simpler mortgage products. The plus: Consumers may be less likely to get into financial trouble. The downside: less consumer choice, Lea said.

For now, since adjustable rates are lower than fixed ones, some mortgage professionals like Susanne Livingston, co-owner of Residential Whole Mortgage in Carmel Valley, are recommending that certain clients get the longest-term adjustable-rate possible with a product such as a 10/1. That way, consumers can lock in lower rates for a longer period of time.

“Adjustable rates can prove to be very useful when they’re understood and when consumers are educated,” Livingston said.
