In a shifting real estate market, the guidance and expertise that Inman imparts are never more valuable. Whether at our events, or with our daily news coverage and how-to journalism, we’re here to help you build your business, adopt the right tools — and make money. Join us in person in Las Vegas at Connect, and utilize your Select subscription for all the information you need to make the right decisions. When the waters get choppy, trust Inman to help you navigate.
The amount of adjustable-rate mortgages being offered to consumers has skyrocketed over the past year, according to a report released July 19 conducted by loan marketplace LendingTree.
From the first half of 2021 to the first half of 2022 the number of adjustable-rate mortgages (ARM) offered to users of the service has more than tripled — shooting up 230 percent, the report states.
This surge in demand amounts to something of a comeback for ARMS — loans with interest rates that change periodically. They were most common in the early 2000s leading up to the 2007-2009 market crisis, accounting for 42 percent of new mortgage originations in 2005 — for example. They fell to about 10 percent from 2009 through 2021, according to the report.
Meanwhile, the number of fixed-rate mortgages offered through LendingTree’s marketplace has decreased significantly in the past year falling 9.2 percent, according to the report.
The dramatic comeback of ARMs is attributed to rising mortgage rates, which have nearly doubled in the past year, the report states.
Jacob Channel, a senior economist at LendingTree who authored the report, stressed the importance for consumers to know the risks associated with ARMS, given their propensity to be offered to buyers with lower credit scores, which could potentially contribute to another housing crisis.
“While the findings of our study are not necessarily a cause for concern in the immediate future, if the trend of ARMs becoming more common and being offered to borrowers with lower scores continues, then ARMs may once again contribute to a future housing crisis,” Channel said in a statement. “Because of this, it is very important for both lenders and borrowers to know the risks associated with adjustable-rate mortgages and to not become too cavalier about issuing/seeking out these types of loans.”
The report found ARMs being offered at a much higher rate to consumers with riskier credit scores than they were just a year ago. Between the first half of 2021 and the first half of 2o22, the share of ARMs being offered to consumers with a credit score above 680 decreased by 21.23 percent, while the share of mortgages being offered to consumers with scores between 620 and 679 increased by 19.98 percent and the share of those offered to those with scores of 619 or below increased by 1.34 percent, according to the report.
ARMs appeal to some consumers because they save money in the short term at an average of about $157 a month, according to LendingTree. Their expenses could start to increase in the future though as rates adjust, meaning their savings are not guaranteed in the long term.
The loans contain some safeguards against consumers being overburdened with increasing costs including a provision that prevents the rate on a loan to increase by more than two percentage points the first time it is adjusted and from increasing more than five points over the course of the loan’s lifetime.
However, these safeguards may be too little to protect those unprepared for rates to rise even a small amount, considering an increase of even two percent could cause a person’s monthly expenses to rise by hundreds of dollars, the report notes.