Adjustable-rate mortgages are gaining popularity among homeowners, and recently accounted for about one-third of new loan applications in the country – the highest level in a decade – according to an announcement by the University of Southern California Lusk Center for Real Estate.
Adjustable-rate mortgages (ARMs) feature fixed rates for far shorter periods than the standard 30-year fixed mortgages. Typically, adjustable-rate mortgages feature fixed rates for periods of one year, three years or five years, but other ARMs are available. While ARMs typically have lower starting rates than fixed-rate mortgages, the rate can quickly exceed that of fixed-rate mortgages in an environment of rising interest rates.
And this growth trend in ARMs could create troubles for Southern California homeowners in the long run, said Raphael Bostic of the USC Lusk Center.
“If interest rates increase, some buyers may not be able to afford higher payments and may have to sell their homes,” said Bostic, a former Federal Reserve economist who specializes in tracking the home mortgage market. “This could cause a sudden rush of homes on the Southern California market and depress prices.”
While ARMs are a long-term concern, Bostic said that Southern California is not in immediate danger of a housing bubble. “As interest rates increase, the region’s home sales will slow to more moderate but sustainable levels, and prices will increase more slowly,” he said, adding that job growth and a continued demand for housing in the region have contributed to rising home prices.
The share of activity for adjustable-rate mortgage increased to 34.8 percent of total applications in May, according to the Mortgage Bankers Association.
And according to an April announcement by the Homeownership Alliance, about 82 percent of consumers across the nation favored fixed-rate loans over adjustable-rate loans. In Massachusetts, about 32 percent of consumers favored ARMs; 30 percent of consumers in Colorado and Michigan favored ARMs; and 29 percent of Californians favored ARMs. Alaska, Delaware, Oklahoma, Texas, New Mexico, Pennsylvania and Tennessee had the highest percentages of consumers favoring fixed-rate loans. The data was collected from the Federal Housing Finance Board.
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