Homebuyers scrambling to gain a foothold in the housing market are grappling with affordability issues such as high borrowing rates and home prices.Fixed rate loan with interest on the risehomebuyers may be considering options.
For some it may mean set search aside Until prices or mortgage interest rates go down. Another option to consider is variable rate mortgages (ARMs), writes First American chief economist Mark Fleming. blog post.
Compared to more traditional mortgage products, ARMs offer lower initial interest rates before adjusting to higher interest rates in the future. As of early September, the average 30-year fixed rate mortgage rate was 5.94%, more than double from a year ago, while the average ARM rate was 4.81%. of the Mortgage Bankers Association (MBA) weekly survey.
“As affordability declines, potential homebuyers are turning to variable-rate mortgages to take advantage of lower interest rates,” Fleming said. With current mortgage rates low compared to 30-year fixed-rate mortgages, ARM offers prospective first-time home buyers the option to regain their buying power in an environment of rising interest rates. increase. ”
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Experts say ARM will provide more home buying power
According to MBA, there has been significant adoption of ARMs this year, especially in the spring and early summer, with 30-year fixed rates rising, mostly above 5.5%. In the first half of 2022, ARM’s share of all mortgages nationwide rose from his 3% to 10%. This is the highest percentage since before the 2008 housing crash.
Esther Phillips, director of sales for Key Mortgage Services, said ARM’s strongest appeal is that it helps consumers justify a purchase or keep the home they want to buy within their monthly budget during a difficult interest rate period. I said it helps to do that. This is because her ARM loan is significantly cheaper than a fixed-rate mortgage in the short term, resulting in lower monthly payments for the first few years of the loan.
“Consumers’ home-buying power—the amount they can afford to buy based on median household income and a given mortgage rate—increases when mortgage rates fall,” Fleming wrote. “In fact, at these rates, ARM increases consumers’ home buying power by about $44,000 compared to his traditional 30-year fixed-rate mortgage.”
“More and more people are taking advantage of floating rates,” said Melissa Cohn, regional vice president of William LaVeys Mortgage.
She added that the lower initial interest rate offered by ARM will allow more buyers to stay in the buyer pool. “They can consider ARM or wait for better buying conditions that may not happen for some time,” she said.
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Some experts continue to worry about ARM risks
The risk for ARMs is that interest rates (and the borrowers’ monthly payments) will rise as interest rates are adjusted periodically. Depending on how much interest rates rise, it could end up being a fixed rate or better loan in the long run. This is especially dangerous for borrowers with tighter budgets, whose monthly mortgage payments may stretch beyond their affordability point.
“The introduction rates are being used like carrots, suggesting they can refinance before rates rise,” said Erin Sykes, real estate adviser and chief economist at Nest Seekers International. “This is very dangerous for the average homebuyer, especially as the economy enters a period of uncertainty.”
Fortunately, according to Fleming, today’s ARM is very different from the product that was credited with causing the 2008 housing market crash. He said the product has evolved to mitigate the risk of significant payment shocks when the fixed rate period ends and interest rates become adjustable.
However, product concerns remain. If borrowers are currently struggling to get a fixed-rate mortgage, it will be even more difficult in the next five to seven years, said Ran Elisafu, the founder and managing partner of his group North Wind. said it is likely. “If interest rates continue to rise and a recession hits, ARM could leave Americans with affordable mortgages after the teaser rate expires,” Eliasaf warned.
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