The number of people applying for an adjustable rate mortgage has doubled in three months, according to the Mortgage Bankers Association. This massive increase in the number of people taking on adjustable rate mortgages has been attributed to increasing mortgage rates, which have made traditional fixed-rate mortgages more appealing. Some analysts fear this could be pointing to a cooling housing market, as interest rates rise and home sales continue to decline.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage, or ARM, is a type of mortgage that has an interest rate that can change over time. Unlike a fixed rate mortgage, which has an interest rate that is set at the time the mortgage is issued, an adjustable rate mortgage only keeps its initial interest rate for a few years, usually periods of three, five, or ten years. After that, the interest rate may change, usually increasing over time (depending on the market).
Why Do People Get Adjustable Rate Mortgages?
People tend to get adjustable rate mortgages because they are easier to get than fixed rate mortgages, relatively speaking. They tend to require less stable credit, and usually offer lower interest rates than fixed rate mortgages, at least at first. This can make ARMs appealing to people who otherwise could not, or would not, get a mortgage for a home. However, ARMs are also often considered riskier because people can fail to keep up with their mortgage payments if their interest rates rise too much.
Why Are People Getting ARMs Now?
Generally speaking, people seem to be moving to get adjustable rate mortgages more than they previously did because of changes in the housing market. Rising interest rates and rising home prices have combined together to make fixed rate mortgages unaffordable for many prospective home buyers. While ARMs may be riskier in the long run, they can at least keep a home in the realm of affordability in the short term.
What Does This Mean For the Housing Market?
Overall, the tendency to move towards ARMs instead of fixed rate mortgages may be a sign that the housing market is cooling. Home prices are reaching a point where most buyers cannot participate in the market without taking on these riskier mortgages, which means there may be a correction in the market at some point in the relatively near future. If this happens, people could find themselves with property that declines in value relative to the price they purchased it for, with an adjustable rate mortgage they may not be able to refinance.
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