As Emily Peck teases, they're b-a-a-c-c-k. ARMs, that is.
Adjustable-rate mortgages, which are initially issued with a lower rate than, say, the 30-year fixed rate and jumps up after a certain time period (usually 1, 3 or 5 years), made up about 11% of all mortgage applications last week.
That’s the highest level since the 2008 Great Recession, according to the Mortgage Bankers Association.
It’s another way the Federal Reserve’s interest rate hikes are affecting markets and consumer behavior.
Until recently, 30-year fixed mortgage rates were super low. As of the end of last year, they were hovering just above 3.0%. During the pandemic, they’ve gotten as low as 2.77% last August.
It didn't make sense to take on a riskier adjustable loan; ARM rates have ranged between 2.37% and 2.56% between last August and the end of December.
Now with rates on 30-year fixed loans more than doubling to around 5.3% this week – and ARMs often coming in at more than a point less – homeowners are going for it.
Many readers might remember ARMs from the housing bubble that led to the 2008 financial crisis and subsequent bailout.
Back then, many subprime (unqualified or high-risk) borrowers took out interest-only ARMs with super-low teaser rates that would skyrocket to unaffordable levels – some after 1, 3 or 5 years.
When their monthly payments went up, many of them couldn't pay and wound up in foreclosure and bankruptcy.
Banking regulations and underwriting standards have tightened since then, prohibiting a lot of that kind of stuff.