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Mortgage rates jump above 4% and borrowers are encouraged to return to the mortgage staple

The cost of buying a home is getting higher and higher. Not only are home prices rising by double digits each year, but mortgage rates are also rising, surpassing 4% for the first time since May 2019. -Mortgage Interest Rates — One of the financial products blamed for the 2006 housing crisis.

According to CoreLogic data, the share of adjustable rate mortgages (ARMs) mortgages doubled from the 10-year low of 4% in January 2021 to 10% in January. .. The rate is usually adjusted annually based on the year (usually 3 to 10 years) and then the fluctuating benchmark rate plus an additional margin such as 2%.

It’s clear why interest in ARM has revived. These loans offer a much lower initial interest rate than traditional 30-year mortgages. For example, the average initial interest rate for 5/1 year ARM (fixed ARM). According to Freddie Mac, it is reset every year for five years) at 3.19%, almost 1 percentage point lower than the current 4.16% interest rate on 30-year mortgages. When it expires, buyers may hit at a higher rate — such as 5.19% instead of 3.19%.

Its initial rate can represent significant savings for homebuyers dealing with record high home prices. Almost 27% surge From the beginning of the pandemic to February, it reached a high of nearly $ 400,000, according to Realtor.com data.


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Looking at the math, that means that a buyer who puts 10% in a $ 400,000 home and lends the rest at today’s rate with a 30-year loan will get a monthly payment of $ 1,752. However, the initial rate ARM for 5/1 will be $ 1,555, saving about $ 2,400 a year.

“When we see prices rising more and more, their purchasing power gives buyers more options to look at their homes,” said Brian, chief credit officer of LoanDepot, which provides loans to consumers, including mortgages.・ Rag states. There is more flexibility when comparing ARM and fixed rates. “

The resurgence of interest in ARM could raise questions about whether the housing market reflects some of the 2006 trends. At this time, home prices skyrocketed as buyers got real estate and lenders opened their wallets to provide loans. Today’s pandemic housing boom and 2006, banks’ stricter lending standards and more.

According to the National Association of Real Estate Agents (NAR), soaring mortgage rates have driven many buyers out of the market. Buyers said they expect interest rates to rise further to 4.3% at the end of the year, according to the NAR.

“The higher the long-term Treasury yield, the higher the mortgage yield will be in the short term,” said Tan Kai Xian, a US analyst at Gavekal Research, which will increase monthly housing costs. He added that inflation would rise. ..

Bad reputation

According to Rag, today’s lending standards are stricter than they were during the 2006 housing bubble. Of the mortgages over a decade ago, some lenders gave out so-called “liar loans,” or mortgages that required little or no income records. Today, banks require buyers to confirm their income in order to qualify for a loan.

Adjustable mortgages have become a bad name in the housing bubble because they were hanging from some buyers who couldn’t qualify for traditional mortgages. According to a survey by the Brookings Institution, it promotes loans.

But that became a problem when the housing market collapsed and ARM reset to a higher rate that those buyers couldn’t handle.


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But today, banks are checking to see if borrowers can handle adjustable rate mortgages. This includes whether income can absorb higher rates after the initial period ends. ARM’s share is increasing, but still well below. It stood in the mid-2000s housing boom, when more than half of new mortgages were adjustable rate loans.

There is also a limit to the amount that ARM can shift higher, minimizing the impact on the borrower.

“Banks ensure that you qualify and there is a limit to changes in interest rates,” said Melissa Korn, regional vice president of William Laveys Mortgages.

ARM could help homebuyers who don’t plan to stay home for more than a few years, Ruggofloan Depot said.

“Ideal for people who aren’t homes of eternity,” Rag said. That is the ideal method. “

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