Adjustable Rate Mortgages Make a Comeback

Adjustable Rate Mortgages (ARMs) are making a comeback. In December 2018, 9.2 percent of all new mortgage loans had an adjustable rate, up from 8.9 percent in November and a far above the 5.6 percent of mortgages that were ARMs in December 2017, according to the Origination Insight Report from Ellie Mae, a software company that processes 35 percent of all mortgages in the United States. The number of ARMs in December 2018 was the highest share recorded since Ellie Mae began tracking loans in 2011.

The resurgence of ARM’s is being driven by a gap between the 30-year fixed rate and the 5/1 ARM. According to Freddie Mac, the average 5/1 ARM was 3.96%, while the average 30-year fixed-rate mortgage was 4.46%.

Karan Kaul, an Urban Institute researcher, called the recent explosion in the size of ARMs “ironic” for their similarities to the bubble era, but said that things are very different now. An important difference is that ARMs now make up a single-digit percentage of all mortgages, whereas during the bubble years they were about 35% of the total. It’s worth noting that ARMs account for 18% of all mortgages in California, a confirmation that in the priciest corners of a pricey market, people must be as strategic as possible.

While ARM’s may initially afford buyers the luxury of lower monthly mortgage payments, these payments are usually fixed for only 5-years. Afterwards, monthly payments will adjust/reset in accordance with the prevailing rates at that time. This means that your payments may rise substantially after 5-years.

Other Stats

Other statistics of note in December included:

  • The time to close all loans increased to 47 days in December, up from 46 days in November.
  • Time to close a purchase loan decreased to 47 days.
  • Time to close a refinance increased to 44 days.
  • The percentage of purchase loans rose to 71 percent of total loans in December, up from 70 percent the month prior.
  • Overall FICO scores dropped one point to 726.
  • LTV held at 79 for the fifth month and DTI held at 26/39.