On Monday, the National Association of Realtors reports the number of pending home sales for the month of November. The NAR recently reported that home sales have been picking up, thanks in large part to lower mortgage interest rates — that’s 30-year fixed mortgages and adjustable-rate mortgages. Demand for the latter has been rising.
Applications for adjustable-rate mortgages have more than doubled over the past year, according to the Mortgage Bankers Association.
That demand comes down to savings, said MBA chief economist Mike Fratantoni.
“If a borrower takes an adjustable-rate loan where, instead of a 30-year fixed rate, it’s fixed for the first five or seven years, they can save almost a full percentage point in rate,” he said.
That advantage over today’s fixed-rate mortgages could always go away if interest rates rise in five or seven years and homeowners don’t refinance. The shock of rising interest rates on adjustable mortgages contributed to the 2008 financial crisis.
But post-crisis regulations tightened up lending standards for adjustable-rate mortgages, according to Mark Fleming, chief economist with First American.
As a result? “While there is adjustment of payment, it’s not nearly as shocking of the ARMs of recession old,” Fleming said.
Plus, he added that says many borrowers taking out adjustable-rate mortgages right now aren’t worried about what’ll happen when those interest rates adjust.
“I think the calculus people make is, ‘Well, I’m likely to move within five to seven years anyway,’” he said.
In other words, Fleming said many borrowers are betting that the rewards of an adjustable-rate mortgage are worth the risks.