A Risky Mortgage Instrument Rising Again
Before the 2008 financial crash, the market could hardly imagine that housing prices would fall. Today a similar question arises: could a federal rate hike play the same destabilizing role?
Nick Lichtenberg, business editor and former executive editor of global news at Fortune, notes that a risky mortgage product once blamed for fueling the Global Financial Crisis is gaining traction again. However, there are three key differences this time.
Adjustable-Rate Mortgages Return
Adjustable-rate mortgages (ARMs), once notorious during the subprime meltdown, are growing in popularity as buyers seek relief from high borrowing costs. According to the Mortgage Bankers Association, ARMs account for nearly 13% of all mortgage applications this fall, the highest share since 2008.
Lower Initial Rates Attract Buyers
ARMs appeal to homebuyers because they start with interest rates about one percentage point lower than fixed-rate loans. The typical 5/1 ARM has an interest rate in the mid-5% range, compared with over 6.3% for a 30-year fixed mortgage.
“On a $400,000 loan, that initial discount translates into $200 or more in monthly savings,”
This difference can make homeownership possible for first-time buyers or those seeking a bigger property.
The Long-Term Bet
Every adjustable-rate mortgage carries uncertainty. After the initial fixed term—usually five, seven, or ten years—the rate resets according to broader market conditions. Borrowers today are essentially betting that the Federal Reserve will cut rates before their mortgage adjusts upward.
Author’s Summary
The revival of adjustable-rate mortgages shows homebuyers’ struggle with high rates, balancing short-term savings against future financial risk.