With rising
interest rates, adjustable-rate mortgages (ARMs) are starting to gain steam in the
real estate market.
ARMs
are slowly growing in popularity as interest rates continue to climb. While they
are not being used as much as in the past, their share has grown by half since
May. ARMs fell off the map while interest rates fell to historic lows and were
widely accused of causing defaults once the introductory rates jumped after the
initial lock-in period.
With
recent news that the Federal Reserve is considering a slowing of the
bond-purchase program, rates for 10-year U.S. treasuries have climbed more than
a percentage point between early May and July. Fixed-rate mortgages, which
follow 10-year Treasuries, rose to 4.51% last month from 3.34% in January.
ARMs
follow short-term rates like one-year Treasuries. Because the Fed will keep
short-term rates very low until unemployment is 7.0% or lower, one-year
Treasuries traded at a 0.1% yield on Wednesday, down 0.04% in the last month. Because
of this, fixed-mortgage rates have risen twice as fast as five-year ARMs.
According
to data from the Mortgage Bankers Association of America, last week, 6 percent
of mortgage applications were for ARMs, up from only 4 percent in May. The
ability to secure an ARM has helped keep homes affordable and has also kept
buyer interest high despite the rise in fixed-rate mortgages.
A major drawback to
the ARM is based on the “adjustable” component. Interest rates can rise after
one, five, seven or 10 years, with the first jump potentially between 2 and 5
percentage points. Because of this, they are generally best suited for buyers
who plan to sell or refinance before the interest rate changes.