Adjustable-rate mortgages – the answer to housing market volatility?

“That’s like talking about the Old World,” she said in an interview with Mortgage Professional America. “Adjustable-rates are a very different animal today. The adjustable-rate mortgages that gave ARMs a bad name and reputation were loans with which monthly payments were not sufficient even to cover the interest that was due on the mortgage and the loan negatively amortized, meaning that each payment you made was only a partial payment of the interest due. Instead of paying down your mortgage, the principal balance grew each month. Those mortgages don’t exist today, except in very rare exceptions.”

Read more: What’s the verdict on adjustable-rate mortgages?

Today’s version is decidedly different, she added. “Adjustable-rate mortgages today are loans that amortize,” she said. “They walk, talk and act like a fixed rate for the initial rate period.”

Today’s ARMs offer flexibility too, she noted: “You can get an adjustable-rate for three years, five years, seven, up to 15 years. Let’s say there’s a seven-year adjustable: During the first seven years, it’s a fixed rate as far as you know. The monthly payment is interest and principle; you’re paying down your loan the same way; you’re amortizing it the same way you would with a 30-year fixed. At the end of the initial rate period, there are adjustments. You’re never negatively amortizing the loan. There are caps, formulas that determine what the rate will be using well known, easily found indices such as the 10-year Treasury or the new SOFR Index. They act as a great bridge.”

With rates rising, buyers are looking to save money. Glancing at current rates – fixed versus adjustable – that tactic would yield benefits, adding to ARMs appeal. As of mid-June, the average rate of a 30-year fixed-rate mortgage is 5.23% — more than twice what it was a year ago. An ARM, meanwhile, is averaging only 4.12%.