Adjustable Rate Mortgages on the Rise

More and more house buyers prefer adjustable rate mortgages over their fixed rate counterparts. This trend has become quite clear since the beginning of 2014. It has already raised concerns that another housing bubble is in the making.

In the fourth quarter of 2013, the number of adjustable rate mortgages operated by banks was 37.1%. This was 1.3% higher than the fourth quarter of 2012 and 5.2% higher compared to the same quarter of 2011. The highest rate of increase is observed in the jumbo loans. Out of all loans from $417,000 to $1 million, 31% had an adjustable rate. Their share marked a 9% increase from the fourth quarter of 2012. The number of adjustable rate loans for over $1 million increased by 5% from the last quarter of 2012 to the last quarter of 2013 to reach a share of 61%.

The rise in the number of adjustable rate mortgages is determined above all by the attractive interest rates. Currently, the average interest rate on an ARM is 3.02% while the average rate on a 30-year fixed loan is 4.32%. The increasing consumer confidence has also played its role. With the economy having recovered and having set on the growth curve once again, people are more confident about their jobs and income and this makes them choose flexibility.

The greatest concern about the growing number of adjustable rate mortgages is that banks may still provide finance to people who cannot afford to repay. The lenders say that they have learned their lesson and now they apply much stricter criteria for the approval of loan applicants. Home buyers have to have excellent credit score and be fully capable of making the monthly payments on both the principal and interest.

The growing number of adjustable rate mortgages does not pose a threat for homeowners, lenders and the economy as a whole, at least for the time being.

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