Rising interest rates increase the appeal — and the risk — of ARMs
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As rising interest rates continue to make homes even more expensive for potential buyers, we’re seeing new demand for adjustable-rate mortgages.
These are home loans that offer a fixed rate for an introductory period. Then, the rate adjusts to a number based on a benchmark interest rate. Adjustable mortgages typically result in a lower monthly payment than fixed-rate mortgages — at least at first. But they can be risky, too.
Bankers at Bay State Savings Bank in Massachusetts have been getting a lot of questions about adjustable mortgages.
CEO Peter Alden said part of his job is explaining what can happen if rates eventually rise. “So that they know, in dollars, based on what they want they want to borrow, what that impact could be five years out, for example,” he said.
If interest rates rise, borrowers might not be able to afford their payments.
During the 2008 financial crisis, “many of those adjustable-rate mortgages went into default,” said real estate professor Susan Wachter at the Wharton School.
Regulators have stepped up their scrutiny of the adjustable mortgage market. For instance, lenders are required to collect more information from borrowers, according to Patricia McCoy at Boston College.
“Today, a lender has to make sure that the person has enough income to afford an adjustable-rate mortgage at the highest interest rate it can go,” she said.
The Mortgage Bankers Association says the number of applications for adjustable mortgages has gone up 22% over the last year.
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