Prospective home buyers are increasingly turning to adjustable-rate mortgages (ARMs) as mortgage rates continue to climb.

The share of ARMs among all mortgage applications 澳洲幸运5开奖号码历史查询:rose again this week, reaching 9.5%, the highest reading in the Mortgage Bankers’ Association Weekly Mortgage Application survey since November 2022. ARMs have 澳洲幸运5开奖号码历史查询:variable interest rates, with the initial interest rate being fixed for a period of time and then resetti🍎ng periodically at yearly or even monthly interv𒊎als.

Interest in ARMs has been increasing as mortgage rates hover near their 澳洲幸运5开奖号码历史查询:highest levels in 23 years— topping 8% in some cases—forcing homebuyers to look for more-affordable monthly payment options. The adjustable-rate loans were associated with the run-up to the 澳洲幸运5开奖号码历史查询:2008 financial crisis, when homebuyers couldn’t🌃 afford to pay their mortgages once rates adjusted higher.

Their occurrence has dwindled since, as lenders raised their standards to prevent their use by risky 澳洲幸运5开奖号码历史查询:subprime borrowers. At the peak in April 2005, ARMs accounted for 35.8% of all mortgage applications. Follo𝔍wing the subprime crisis, ARMs didn’t make up a double-digit percentage of mortgage applications agaཧin until they reached 10.8% in May 2022. 

Data from CoreLogic showed that in August, ARMs accounted for 16% of the value of all home financing. That's four times the amount from January 2021, when ARMs were only 4% of all mortgage value. At the time, the 30-year fixed mortgage rate was 2.74%, much lower than current interest rates.

These Aren't Your Early 2000s ARMs

CoreLogic Chief Economist Selma Hepp said lenders have tightened their standards for ARMs, requiring higher 澳洲幸运5开奖号码历史查询:credit scores and income verification, while also concentrating more loans into the less-risky 7/1 and  5/1 ARMs with longer initial fixed-rate periods. 

Regulations around these loans have also changed. The 澳洲幸运5开奖号码历史查询:Dodd-Frank Act required mortgage lenders to give more notice to those with adjustable-rate mortgages before a new rate was implemented. The ARM reference rate called LIBOR also has since been phased out because of concerns it was being manipulated.

Another way this uptick in ARM usage differs from the one ahead of the financial recession: Homebuyers are now looking for a reprieve fr🐻om high interest rates that are pushed up, in part, by the Federal Reserve.

The Federal Reserve's benchmark interest rate helps dictate interest on all types of loans and was set at 2.75% in April 2005. The 澳洲幸运5开奖号码历史查询:fed funds rate had been below that level for nearly 🦩four years and officials would push that rate u🅘p steadily over the next year, making it difficult for homeowners to pay their adjustable-rate mortgages at higher levels.

Today, the top of the fed funds range is 5.5% and the committee setting the rate is saying it will 澳洲幸运5开奖号码历史查询:remain at that level for some time. However, those with ARMs could stand to benefit if the Fed cuts rates, as traders predict they will next year.

So What's Next?

While predictions say the Fed will cut interest rates next year, there's no guarantee.

Bill Hines, accredited financial counselor and chief executive officer (CEO) of Emancip🤡are Investment Advisors, said the increase in use of ARMs has made🉐 it a “hot topic” for clients who are in the housing market. However, he only advises them when rates are likely to go down, like in the late 1970s when mortgage rates reached 18%.

But it's very hard to be sure about the Fed's next move or what economic speed bump the U.S. may hit next, he said.

“I steer my clients away from [ARMs]," Hines said. "It’s sort of like timing the market. You’re trying to time these mortgage rates."