Lenders Put a Postcrisis Twist on the Adjustable-Rate Mortgage

April 29, 2014
American Banker 
mortgage lending news
Adjustable-rate mortgages, with their lower initial rates, are resurfacing as interest drifts higher.

Although it is not unusual for ARM volume to rise when fixed rates go up, today's borrowers are more likely to balk at an adjustable loan due to the negative connotation with subprime lenders and the financial meltdown. In fact, the Mortgage Bankers Association's application survey for the week of April 18 found that ARMs made up 9 percent of all new loan requests -- down from 32 percent during the same week 10 years ago.

To allay the reservations of the post-crisis borrower, many lenders are promoting the 5/5 ARM -- which aims to give consumers more certainty about their future monthly bills by splitting the difference between traditional ARMs and the fixed-rate loan. Its interest is fixed for the first five years, then adjusts once every five years for the rest of the 30-year term. This is a safer concept to consumers than the 5/1 ARM.

Today's products differ from the option ARMs and other alternatives that flooded the mortgage market during the boom years. Still, experts acknowledge, like their predecessors, today's adjustables do present a risk when they are granted to borrowers who are not part of the product's targeted user population. "If your time frame is greater than five years, you are exposed to some risk," says Keith Gumbinger of mortgage research firm HSH.com. "So you must go in with your eyes wide open and know what that risks presents to you and your budget."

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