Some Home Buyers are Turning to Adjustable Rate Mortgages to Compete

When purchasing a home with financing, there are many options available to buyers. The standard 30-year fixed mortgage is the perennial favorite. It provides a loan with a fixed interest rate over the 30 year lifespan of the mortgage. As of last week, the interest rate on a 30-year fixed mortgage continued to increase to over 5.12%. This is up more than 1.5% just since 2022 began, and economists anticipate the rise to continue. Some buyers do not fully understand the importance of the interest rate as it applies to new mortgages. 5% now vs 3% last year might not seem like much, but this difference will have a huge impact on a buyer’s monthly payment, and ultimately how much home they can afford. With home prices reaching record levels, a rising interest rate literally means that millions of buyers simply cannot afford to buy right now. In fact, mortgage applications are on the decline, big time. Just last week, the amount of applications dropped 1.3% from the week prior. On the whole for the year, mortgage originations are dropping for most mortgage types - except the adjustable rate mortgage, which has seen an upswing to levels not seen in years.?

What is an adjustable rate mortgage? Unlike with a fixed mortgage, an adjustable rate mortgage has interest rates that fluctuate over the course of its loan term. Usually the way it works is that a lender will agree to a rate for a short period of time, usually just a few years, after which point the market will be re-evaluated periodically and the rate will change accordingly. How often this is done is determined at the outset of the loan origination, with changes often happening either yearly or monthly depending on the loan terms. Because they do not need to predict or account for future rates, the initial interest rate for an ARM is usually lower than that of a fixed-rate mortgage. This allows for buyers to not only have smaller payments, but to afford more expensive properties. This is why many buyers today are seeking out adjustable rate mortgages to combat this market. The initial lower payments are allowing them to compete in a market where prices are out of control. The problem, however, is that adjustable rate mortgages and just what they say they are - adjustable. The variable rate could go up by several points over the life of the loan and put eventual future monthly payments out of your budget. This is why ARMs are typically the go-to for buyers who are looking for a short-term purchase that they do not anticipate keeping for more than several years. The quick uptick in ARM applications - for both federal and conventional loans - could mean, however, that regular buyers are turning to this quick fix for a market that is pricing them out of homeownership. The answer will come in a few years when the rates are adjusted on these loans and we will see what steps these buyers take.

If you are in the market to buy in the Keys, you need an experienced realtor who not only knows the ins and outs of the complex Florida Keys real estate market, but one who knows the whole buying process well and can help to educate you on your options. The realtors at Broker’s Edge specialize in helping buyers so that they are supported from start to finish.