Although a recent Freddie Mac survey showed historically low initial-period rates on adjustable rate mortgages, with ARM share expected to rise to 12 percent of the home-purchase market in 2013, local homebuyers are sticking with a safe bet.
And even with ARM rates almost a full percentage point lower than 30-year fixed rate mortgages – in some cases 2.5 percent versus 3.5 percent – borrowers say a murky financial future is pushing them to lock in for the long-term.
Cherie and Tom Hitchens looked at both fixed and ARMs this past year when purchasing their new home.
Cherie Hitchens said, when thinking about the future, choosing a fixed-rate mortgage at such a low rate was “a no-brainer.”
“We looked at both options,” she said, “but in the end liked the idea of a long-term, low interest rate that was guaranteed for the life of the loan.”
Housing experts echoed Hitchens’ conservative sentiments.
“With interest rates at such historically low levels, the revival of ARM products might be attractive as a ‘temporary bridge back to even’ for people who find themselves upside down in a mortgage,” said Jack Lane, a Traverse City Realtor.
In years past, homeowners could rely on a steadily appreciating housing market to keep them out of trouble. Not so anymore, Lane said.
“Here in our area, the risk of having to refinance in three or five years into a significantly higher interest rate makes ARMs a really bad bet,” he said.
In spite of the risks, there are some homebuyers that find ARMs appealing, said Dave Durbin of Bay Mortgage.
“I have seen more ARMs in the past year,” he said. “But ARMs aren’t for everybody and with fixed rates so low today I’d say about 90 to 95 percent of my clients choose the fixed rate route.”
According to Durbin, borrowers who prefer ARMs are generally expecting to be in their homes for a short period of time, or are expecting a significant income increase. Some just take a gamble, however, and are willing to take a chance on the market.
New mortgage regulations, however, might impede the gambling crowd.
Early this month, (JANUARY) the Consumer Financial Protection Bureau released much anticipated new mortgage rules, which will require lenders to ensure prospective buyers have the ability to repay their mortgage.
According to its press release, the bureau said the new rules are “common sense.”
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”
Lake Michigan Credit Union mortgage loan officer Julie Courtade agreed with the new common sense regulations, saying she would actually ‘discourage’ clients from applying for an ARM.
“With fixed rates being the lowest in history, there are very few good reasons why anyone should get an adjustable rate,” she said. “I would actually try to discourage a customer from an adjustable rate unless they had a compelling reason they wanted one that made financial sense.”