Housing Watch: Return of adjustable-rate mortgages

FRESNO, Calif. (KFSN) -- During the foreclosure crisis, many under-qualified borrowers were lured by predatory lenders into adjustable-rate mortgages.

A cap now limits how much today's rate can rise on an "adjustable."

Interest rates have topped 7% and ARM'S look attractive again.

"Well, now those loans are starting to come back," says Paul Salazar with Sierra Pacific Mortgage. "Those loans will let people qualify for five years at a lower interest rate or maybe 7-10 years, as well as there is no pre-payment penalty like it was in the old times."

Those pre-payment penalties made it more difficult to refinance back then.

Salazar says an adjustable rate mortgage could start below 7% and remain that way for about three years before it adjusts depending on market rates.

He adds lenders now face stricter guidelines in offering an adjustable rate and borrowers must now have reasonable equity to pay back the loan.

Salazar says "adjustables" were initially designed for people with high credit scores who planned to live in an area for a limited time.

If you're confident you'll be in your home for a period shorter than the ARM's fixed-rate period, the loan could make sense.

Perhaps you plan to sell in a few years.

"Those are people that say I want this house," Salazar said. "This is my dream house, but there's no way I could afford it if I go with a fixed rate. They're saying, 'Okay, I'll go with the adjustable.' and then as time goes by, they'll be able to refinance into another adjustable if the market is not lower or into a fixed loan when the market goes down."

The online company Lending Tree says it has seen ARM applications triple since 2021.

The Mortgage Bankers Association says adjustable-rate mortgages made up about 10% of all new home loan applications so far this year.