This is causing more people to apply for adjustable-rate mortgages, one of the financial products that were blamed for the housing crisis in 2006.

CoreLogic data shows that the share of adjustable-rate mortgages (ARMs), doubled to 10% in January. This is up from a 10-year low at 4% in January 2021. The initial rate of ARMs is usually low for three to ten years. After that the rate adjusts annually on the basis of a fluctuating benchmark rate and an additional margin such as 2%.

The reason ARMs are seeing a resurgence in popularity is that these loans have an initial rate far lower than a traditional 30-year mortgage. The average 5/1-year ARM rate (which is fixed for five years and then resets each year) is 3.19%. This is almost one percentage point less than the 4.16% current 30-year mortgage rate to Freddie Mac. However, buyers can still get a higher rate after the 5-year initial rate expires — for example, 5.19% instead if 3.19%.

This initial rate could be a significant saving for homebuyers facing record-high home prices. According to data from Realtor.com, the median listing price for properties has risen almost 27% in the period February through February since the outbreak. It reached a peak of nearly $400,000

If you do the math, that would mean that a buyer who pays 10% down on a $400,000 house and then finances the rest with a 30-year loan at today’s rates will pay a monthly $1,752. The 5/1-year ARM’s initial rate would be $1555, which is a savings of approximately $2,400 each year.

Brian Rugg, chief financial officer at loanDepot, which provides loans to consumers, including mortgages, stated that “when you see that prices continue rising, it gives buyers more options for buying a home.” It gives you more flexibility when you compare ARMs to fixed rates.

There are questions as to whether the resurgence of interest in ARMs could be a reflection of some of the 2006 trends. In 2006, home prices soared because buyers bought more properties and lenders were willing to lend money. Financial experts point out that there are differences between today’s housing bubble and 2006’s. These include the stricter lending standards of banks.

Many buyers are being priced out of the market by the rise in mortgage rates, according to the National Association of Realtors . NAR stated that 6.3 million households have been priced out of the home-buying marketplace since year-start. This includes 2 million millennial buyers. NAR stated that rates are expected to rise even more, with the year ending at 4.3%.

Bad reputation

Rugg pointed out that lending standards today are more stringent than they were during the 2006 housing bubble. Some lenders gave out “liar’s loans” during the housing bubble more than a decade ago. These were mortgages that did not require income documentation. Banks require that buyers prove their income in order to be eligible for a loan.

Because adjustable-rate mortgages were offered to buyers who could not qualify for conventional mortgages, they earned a bad reputation in the housing bubble. According to research by Brookings Institution, lenders were more willing than ever to approve the loans because the buyers had lower monthly payments.

This became a problem when the housing market crashed, and the ARMs were reset to higher rates than the buyers could handle.

Experts say that banks today check to ensure that borrowers are able to handle adjustable-rate mortgages. This includes whether or not their income can absorb the higher rate after the initial period ends. Although ARMs are increasing in popularity, they still fall far short of the level of the mid-2000s housing boom when more new mortgages were adjustable rate loans.

There are limits to how high an ARM can be shifted, which minimizes the impact on borrowers.

Melissa Cohn, regional vice president at William Raveis Mortgage, stated that banks will ensure you are eligible for this, and there is a cap on rate changes. It’s a completely different market.

Rugg, loanDepot noted that ARMs are a good option for homebuyers who don’t intend to stay in their home for more years than they need.

Rugg stated that it is ideal for those who don’t want to make this their permanent home. As a starter home, they get a lower interest rate for building up income. They can then trade up to move into larger homes. This is my ideal scenario.