A Risky Mortgage Instrument Returns, but with Key Differences
Before the 2008 financial collapse, few could imagine home prices falling. Today, some see a similar risk forming—not from housing prices directly, but from Federal Reserve rate hikes. Nick Lichtenberg, business editor and former executive editor of global news at Fortune, examines this trend.
Adjustable-Rate Mortgages Make a Comeback
Adjustable-rate mortgages (ARMs), once blamed for fueling the subprime crisis, are rising in popularity again. According to the Mortgage Bankers Association, ARMs now make up nearly 13% of all mortgage applications this fall, the highest share since 2008.
Why Buyers Are Turning to ARMs
For today’s buyers, the draw is straightforward. ARMs typically start with interest rates roughly one percentage point lower than fixed-rate loans. This gap can determine whether someone can afford to purchase a home or remain on the sidelines.
- The standard 5/1 ARM offers a rate in the mid-5% range.
- By contrast, 30-year fixed loans hover around 6.3% or higher.
- On a $400,000 loan, this difference can mean monthly savings of $200 or more.
The Hidden Risk of Rate Resets
Every adjustable-rate mortgage carries uncertainty. After the initial fixed period—usually five, seven, or ten years—the rate adjusts based on market conditions.
“Today, that means buyers are betting the Federal Reserve will cut rates before their loan recalculates.”
This gamble underscores how homebuyers are navigating a high-rate economy, weighing short-term savings against long-term risk.
Author’s Summary
Adjustable-rate mortgages are back in favor as buyers chase short-term relief, but the future hinges on unpredictable Federal Reserve decisions.