The Return of the Adjustable Rate Mortgage

By Jason Katz, Vice President of Mortgage Lending for Guaranteed Rate Mortgage

According to the

Wall Street Journal

, during the last quarter of 2013, adjustable-rate mortgages (ARMs) were up 22% from the previous year and are at their highest since the third quarter of 2008. ARMs were to blame for many of the foreclosures during the financial crisis, yet they are currently rising in popularity. Are we headed for another meltdown?

Similar to in the past, financial institutions are using low-interest rates to attract borrowers. After the low fixed-rate period ends, ARMs can increase by as much as six percentage points. Borrowers who choose ARMs are taking a bit of a gamble: they’re betting that the rates will stay low or that they will sell their homes before the loan’s adjustment period.

There is one major difference, however, between ARMs of today and those that contributed to the financial crisis: today financial institutions are employing stricter lending regulations. For example, they are focusing on borrowers with strong credit and not on those who intend to use ARMs to stretch their buying power farther than they should. According to the

Wall Street Journal

, the average credit score for borrowers who took out ARMs in the fourth quarter of 2013 was 762, compared with 693 in the same period in 2006. Also, some of the riskiest ARM loans are no longer available, such as option ARMs, which allowed for smaller monthly payments which led to a rising loan balance.

Even though financial institutions have implemented stricter lending criteria, with mortgage originations on the decline, financial institutions do seem to be becoming less conservative and expanding their offers of ARMs. Banks are hoping rates will increase enough for them to make up for the initial low interest rate. Also, many banks are keeping these types of loans on their books instead of selling them to government-backed institutions, which means that they will benefit from the larger interest rates when the loans reset.

If you are interested in discussing whether or not an ARM is the right choice for you, please don’t hesitate to contact me. With over 15 years of experience in the mortgage industry and an impressive track record of 100% on-time closings, I look forward to finding you a loan to meet your needs. Email me at

or call me at 858-245-5289. NMLS ID: 312660

The views, facts, and opinions expressed in this article are solely those of the original author and other contributors and do not express the opinions of Guaranteed Rate, Inc.