Adjustable-rate mortgages fell out of favor with borrowers when the housing market came crashing down but last year started what could turn into a full-fledged comeback. With property prices and mortgage rates creeping up in 2012, more consumers saw ARMs as a way to keep their monthly payments in a workable range.
Their popularity is poised to grow even more in 2014, with experts forecasting higher interest rates. The going rate on a 30-year fixed loan hit 4.48 percent last week, but a five-year ARM averaged just 3 percent.
Industry insiders say ARMs are most appropriate for home buyers who expect to move after only a few years or for those who have high, but irregular, income. Gary Kalman of the Center for Responsible Lending believes this option may also benefit others, such as a family in which one parent will return to work after staying home with the kids. "I don't think the product, in and of itself, is inherently a bad product," he says. While ARMs did catch some of the blame for the housing meltdown, lenders since have mostly eliminated "option" ARMs and other high-risk variations. "The ARM products that remain in the marketplace today ... are really venerable, long-dated products," according to Keith Gumbinger of HSH.com. In addition, new federal regulations taking effect this month should further curtail some of the riskier ARMs, such as interest-only products and those with balloon payments.