Adjustable-rate mortgages now account for 18% of all mortgage applications, the highest share since 2008, as borrowers increasingly bet that interest rates will continue declining. The trend is particularly strong among jumbo loan borrowers purchasing high-value properties.
The typical 5/1 ARM is currently offered at 5.1%, a full percentage point below the 30-year fixed rate. For a $500,000 mortgage, this translates to savings of approximately $330 per month during the fixed-rate period, or nearly $20,000 over five years.
Mortgage advisors are divided on the wisdom of the ARM trend. Bulls argue that the current interest rate environment favors ARMs because rates are likely to fall further, making the eventual adjustment favorable. Bears warn that economic uncertainty could lead to rate increases that catch ARM borrowers off guard.
Today's ARMs include consumer protections that didn't exist during the 2008 financial crisis, including rate adjustment caps, lifetime ceiling rates, and qualified mortgage standards that ensure borrowers can afford potential rate increases.
Lenders report that ARM borrowers tend to be more financially sophisticated, with higher credit scores and larger down payments. Many plan to refinance into fixed-rate mortgages before the adjustment period begins.
