A RE/MAX LLC "For Sale" sign stands outside of a home in Seattle, Washington, U.S., on Tuesday, Nov. 19, 2013. Purchases of previously-owned U.S. homes fell in October to the lowest level in four months as limited supply and higher mortgage rates restrained momentum in the housing-market recovery. Photographer: David Ryder/Bloomberg
SANTA ANA, CALIF. – Adjustable-rate mortgages all but disappeared after the financial meltdown. Now they’re making a comeback.
Nationwide, adjustable mortgages made up 7.4 percent of all U.S. mortgage applications as of mid-November, up from 0.9 percent in January 2009 and 3.8 percent a year ago, Mortgage Bankers Association figures show.
Loan brokers say last summer’s jump in rates for the 30-year fixed mortgage sparked much of the renewed interest in ARMs. The rates for a 30-year fixed mortgage shot up from 3.35 percent in May to 4.58 percent in August.
Borrowers realized, however, they still could get low monthly payments with ARMs, since initial rates on those loans are 1 percentage point or more lower.
“People got spoiled with [30-year fixed] rates at 3.5 percent,” said Alan Renteria, a co-founder of Citizens Direct Home Loans in Yorba Linda, Calif. “That’s why people are going with the adjustable-rate mortgage.”
ARMs also help some home shoppers get a toehold in the market, allowing them to buy a house they couldn’t afford with a 30-year fixed product, mortgage brokers said.
The use of adjustable mortgages still is well below average and remains significantly below the peak of 80 percent of loans at the height of the housing boom in 2004-05.
Some brokers think ARMs still may be too risky for some borrowers. If rates go up, many homeowners may be unable to afford the resulting higher payments.
ARMs, for example, aren’t for people planning to stay put a long time. For them, it’s still better to lock in a fixed rate while interest rates still are near historic lows. The average rate on a 30-year fixed mortgage was 4.29 percent two weeks ago, according to Freddie Mac.
“It’s still a phenomenal rate,” said Paul Miller, a senior loan officer at JMJ Financial, a mortgage banking firm in Aliso Viejo, Calif.
“I’m not putting a lot of my borrowers into ARMs right now because 30-year money is cheap,” Miller said. “Rates have nowhere to go but up.”
He was right: last week rates jumped to 4.46 percent.