Adjustable-rate mortgage borrowers have higher incomes and larger down payments
The share of adjustable-rate mortgages (ARMs) in the US has increased above 12% for the first time in 15 years as the loan product becomes more popular with buyers looking to save money in today's high-mortgage-rate environment.
According to a new Zillow analysis, the percentage of ARM loan applications grew to 12.6% in June before dropping to 12.2% in July. Despite the decline, those two months marked the first time ARMs have exceeded 12% since August 2007.
This type of mortgage usually offers lower interest rates than a conventional 30-year fixed mortgage rate during the first three to 10 years, which makes it attractive when rates are high. However, the rate on an ARM loan can rise or fall after the introductory period ends, bringing long-term uncertainty for borrowers.
Read more: ARMs race builds amidst rising mortgage rates
"Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession," said Nicole Bachaud, senior economist at Zillow. "It's important not to confuse some added risk for an individual borrower with risk to the housing market as a whole.
“Borrowers today are more financially prepared for home buying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road."
The report showed that borrowers who recently financed their home purchase with an ARM appear to have higher median incomes and larger down payments than other borrowers. The median income of buyers who took out an ARM loan was $165,000 in 2021, compared to $91,000 for all borrowers. The typical ARM home buyer put 23.6% down, while the typical borrower overall put down 10%.
"It's likely today's typical ARM borrower would be able to withstand increased monthly payments if mortgage rates were to rise," Zillow said.