Adjustable-Rate Mortgages Gain Steam Again

Shortly after the subprime mortgage crisis, adjustable-rate mortgages were often blamed for leading to soaring rates of loan defaults and home foreclosures — which ultimately caused many borrowers to shun them due to its higher risk than fixed-rate mortgages. Now more borrowers are revisiting ARMs.

ARMs, which have low initial interest rates that change over time, aren’t exactly the same as they were before the subprime crisis though. Lenders have introduced more conservative ARM products that no longer offer extra-low “teaser” rates that adjust every six months or “pick-a-pay” and “option” features that let borrowers pay less than the monthly interest that will give them with a bigger bill later on, The New York Times reports.

The ARMs most in demand are “5/1” and “7/1,” which have fixed interest rates for the first five or seven years and then adjust annually at a capped rate.

Bank of America has reported a higher interest in its ARM products, with nearly twice as many ARM transactions last month than last year. ARMs account for 10 percent of all of its mortgages, the bank reports.

Source: “More Borrowers Are Opting for Adjustable-Rate Mortgages,” The New York Times (March, 17, 2011)