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More Affluent Buyers Turning to ARMs

With the fixed-rate mortgage market riding a constant up and down wave of late, renewed interest by home buyers has been found in adjustable-rate mortgages (ARMs) as buyers hunt for ways to save money.

A new analysis of data by Zillow has found that rather than buyers walking the tight line of affordability, they are turning to ARMs for relief. The study found that most of this new market turning to ARMs are likely to be affluent households who can afford a larger down payment.

Zillow found the share of applications for ARMs rose to 12.6% in June before dipping slightly to 12.2% in July. Those two months mark the first time the share of ARMs has risen above the 12% since August 2007. The interest rate on an ARM loan can rise or fall after the introductory period expires, bringing some long-term uncertainty for the borrower.

"Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession," said Zillow Senior Economist Nicole Bachaud. "It's important not to confuse some added risk for an individual borrower with risk to the housing market as a whole. Borrowers today are more financially prepared for home buying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road."

A recent survey by Redfin found that the typical homebuyer could save an estimated $15,582 over the span of five years, or roughly $260 per month, by taking out an ARM over a typical 30-year-fixed-rate mortgageā€”marking the largest savings for ARM holders since at least 2015.

Arnell Brady II, a Senior Loan Officer at Bay Equity Home Loans, noted that approximately 20%-30% of his clients are now asking about ARMs, a significantly larger share than before the pandemic.

ā€œARMs can work really well for homebuyers who plan to stay in their home for less than five to 10 years, and have the means to cover higher payments when the loan resets,ā€ said Brady.

Home buyers who recently financed their home purchase with an ARM appear to be better positioned than borrowers overall, with higher median incomes and larger down payments. The median income of buyers who received an ARM loan was $165,000 in 2021, compared to $91,000 for all borrowers.

Zillow found that the typical ARM borrower put 23.6% downā€”therefore making the loan smallerā€”while the typical borrower overall put down 10%.

In terms of market breakdown, Black mortgage borrowers have been more risk-averse in their use of ARMs and have not reaped the same rewards, according to the report. ARM loans approved for Black home buyers were for a median property value lower than for Black borrowers overall, a reversal from all other racial groups included in the analysis.

"Adjustable-rate and sub-prime loans disproportionately harmed Black homeowners during the foreclosure crisis," Bachaud said. "Black mortgage applicants, then, have reason to be more risk-averse in their use of ARMs, particularly in a time like today when housing market conditions are changing so quickly. While the popularity of ARMs is rising and the potential benefits are greater for the right type of buyer, the data shows Black home buyers are less willing to accept the added risk after facing greater obstacles to qualify for a mortgage, another signal that lending is a long way from equitable."

Click here for more on Zillowā€™s analysis of the current ARM landscape.

About Author: Eric C. Peck

Eric C. Peck has 20-plus yearsā€™ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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