The Appeal of ARMs (Adjustable-Rate Mortgages)

ARMs (adjustable-rate mortgages) are rising in popularity, and millennials are frequently the customers scooping them up. Today’s ARMs are not the same risky adjustable-rate loans of the past, and they’re a smart option for some buyers. Here’s why ARMs are on the rise.

A Little Back Story

ARMs were extremely popular in the years leading up to the real estate market crash. Buyers with lower credit scores who also couldn’t really afford the loan they were getting opted for ARMs with the promise of an overall lower monthly payment. When interest rates started adjusting, they couldn’t refinance into a lower fixed rate because, simultaneously, their home was no longer worth what they paid for it. This led to disaster for many.

Today’s ARMs are not nearly as risky as they were in the past. Many ARMs come with interest rate caps and longer initial fixed periods. They also usually come without negative amortization. Additionally, ARMs back then were issued without careful documentation, which is not the case today.

ARMs Make a Mortgage More Affordable

Interest rates are slowly on the rise. ARMs usually have a lower initial interest rate, which means a lower initial monthly payment. For those who don’t intend to be in a home for much longer than that initial rate period, an ARM can be a great choice. (For example, if your ARM doesn’t adjust until after the first five years, and you don’t intend to be in your home for longer than five years, an ARM may be right for you. You’ll sell the home before your rate ever adjusts.)

Millennials are living a different, more mobile lifestyle than their parents did (this is actually true for people in other age groups, too). Living in a home short-term and saving for what’s next makes an ARM more appealing than a 30-year fixed-rate mortgage, especially if they’re going to be on the move before long.

Millennials are on the Move

The New Workplace

According to a 2016 Gallup survey of over 15,000 employed adults, 43% said they spent at least some time working remotely. That’s up 4% since 2012. The ability to work remotely offers people a lot of freedom when it comes to housing choices.

Millennials are seeing homes as stepping stones to the bigger and better. Unlike their parents and grandparents, who bought their first homes and settled for twenty-plus years, the new wave of telecommuters isn’t planning on settling down in the first homes they buy.

Much of the younger generation is looking for a little adventure and job advancement before becoming permanent. Telecommuting allows this. So, while millennials are buying homes, many aren’t looking for anything long-term. They want the option to relocate for better job opportunities that will lead to greater buying power.

A Family Matter

It’s also true that millennials are starting families later in life. This is another reason to use an ARM on a starter home. Most aren’t planning on families (which typically bring more permanency) until they are long out of their starter homes.

An ARM is appealing for those with this temporary mindset. It offers the investment and advantage of homeownership but also smaller initial monthly payments.

Market Confidence

While fixed-rate mortgages come with less risk, they represent more permanency, and in some cases, a higher monthly payment. The current trend for many homebuyers is mobility and flexibility.

The rising popularity of ARMs is a clear indicator of market confidence. People are regaining faith in the housing industry and taking more risks. They feel confident in home appreciation and value retention. ARMs are a sound option for homebuyers who understand the ins and outs of adjustable rates.

As of the first quarter of this year, ARMs accounted for 8% of all conventional mortgages, up 2% from Q4 of 2016. (For context, ARMs were just 2% of all mortgages in mid-2009.)

If you have homebuyers interested in adjustable-rate mortgages, be sure to call me today. We’d be happy to find the perfect mortgage for your clients!