Adjustable-rate mortgages (ARMs) may have been a defining trait of the housing market crash. However, the average mortgage rates on 5/1 adjustable-rate mortgages (ARMs) as well as the 30-year fixed-rate mortgages (FRMs) rose by about 70 basis points from August 2017 to August 2018, according to an analysis by CoreLogic.
“ARMs were popular prior to the housing bubble burst and its share of the dollar volume of conventional loan originations dropped to a staggering 4 percent in early-2009 from more than 50 percent during mid-2005,” Archana Pradhan, Senior Professional Economist at CoreLogic wrote on its blog. Though the rates of ARMs have fluctuated from 8-18 percent, increasing and decreasing in tune to the rise and decline of FRMs, the overall ARM share remained stable from last year despite the rise in the mortgage interest rate, the report indicated.
The analysis also found that ARMs accounted for 15 percent of the dollar volume of conventional single-family mortgage originations as of August 2018. It is worth noting that the national share of ARMs had considerable variations across locations and loan sizes. The report found that ARMs are common in expensive areas and among homebuyers borrowing large-balance mortgage loans than for those with smaller loans.
The rate on 30-year FRMs surged to 4.55 in August 2018 from 3.88 in August 2017. Similarly, the rate on 5/1 ARMs rose to 3.87 in August 2018 from 3.15 in August 2017. Buyers perceive ARMs to be a more feasible option on account of its lower initial interest rate, especially for bigger loans compared to FRMs, resulting in bigger monthly savings.
Pradhan noted the strong relationship between the average sale price and the ARM share, wherein it is higher for metros with a higher average sale price. San Jose metro had the highest average sale price and the largest share of ARMs out of all conventional mortgage originations in 2018. Metro areas used in the CoreLogic analysis are Core Based Statistical Areas.
At a stable rate since 2017, ARMs comprised 51 percent of the dollar volume among mortgages of more than $1 million originated during August 2018. The ARM share dropped by 1 percentage point from August 2017 and is currently at 21 percent among mortgages in the $400,001-$1 million range, and remains unchanged from last year among mortgages in the $200,001-$400,000 range at 7 percent in August 2018.
The report reflects on the correlation between the demand for ARMs and FRM rates and the difference in their initial interest rates. For homeowners, relatively low FRM rates continue to be a great option despite the rate having increased a year ago. The analysis also cites higher default rates on ARMs during the crash, rigid underwriting requirement of lenders in recent years, lengthening periods of expected ownership as the possible reasons for the decrease in ARMs volume.