Guide to Adjustable Rate Mortgages (ARMs) in 2023

Remember 2008? If you weren’t involved in the real estate market, you probably still felt the effects of the housing crash. Adjustable rate mortgages were very popular back then and some would say that their mismanagement contributed to the issue.

In simple terms, an ARM is a mortgage that adjusts based on the broader market. They usually have 30-year terms and suit homeowners who expect to sell their homes in a short or medium-term period.

Well, it's 2023 and adjustable-rate mortgages have made a comeback - but don’t be concerned. We’re going to explain exactly what’s going on with ARMs and what you need to know about them

Let’s chat about adjustable-rate mortgages

The Definition of an Adjustable Rate Mortgage

Adjustable rate mortgages change over the term of the mortgage, but start off with a low fixed rate. This is called the introductory rate, which can last three, five, seven, or even ten years.

Once the introductory rate expires, the ARM will automatically adjust itself based on a benchmark. This can work out to give the homeowners lower payments, or higher payments. You can expect an adjustable rate mortgage to adjust around twice a year. The rate changes will continue until you sell your home, complete the full mortgage payments, or refinance. 

Are there any limits to ARM interest rates?

ARMs have caps, which control how high the interest rate can increase. The initial adjustment cap protects you after the introductory rate finishes, and subsequent adjustment caps set maximums for interest rates after that. Lifetime adjustment caps regulate how much the rates can increase during the loan term.

If you want to be connected to some lenders and get more details - schedule a chat with us. 

How ARMs in 2023 are Different to 2008

The adjustable-rate mortgages that you heard about in 2008, the ones that were a major focus of The Big Short (released in 2015), are not exactly the same anymore. Here’s why:

It wasn’t adjustable-rate mortgages that brought about the collapse in 2008, but rather, many lenders were too relaxed (and sometimes negligent) at the time.

Your credit score is just one aspect lenders will look at

The loose way that lenders gave out loans around 2008 created the perfect storm of an economy generating a lot of revenue from ARMs, without homeowners who could make their payments. Income wasn’t verified in some cases and some lenders just took the homebuyer’s word for the level of income they brought in each month.

So, how have adjustable-rate mortgages changed since then?

Buyers these days must have verified income and they need to meet certain qualifications to be eligible. In short, they’ve got to demonstrate that they can make payments each month. It’s not just about a home buyer’s income either, but also their assets, employment situation, and potential debts they may have.

Banks and lenders don’t want to repeat what happened in 2008, so the standards for lending have risen tremendously. 

Adjustable Rate vs Fixed-Rate Mortgages

As you probably guessed already, ARMs adjust over time, but a fixed-rate mortgage doesn’t adjust. Adjustable-rate mortgages are usually popular when interest rates are lower than comparable fixed-rate mortgages. Of course, ARMs look like the clear choice when interest rates are lower, but they can change.

A fixed-rate mortgage offers monthly principles and interest payments that won’t change, so homeowners can rely on steady expenses. With an adjustable-rate mortgage, buyers might see their payments fluctuate after the introductory rate finishes. This could make the payments cheaper under the right market conditions, or they could become more difficult to afford.

If you are thinking about an ARM or fixed-rate mortgage, remember that realtors have financial advisors, mortgage brokers, and lenders in their network. Surely, they’ll be able to point you in the right direction. 

You can also use our mortgage calculator to estimate your monthly payments.

Final Thoughts About Adjustable Rate Mortgages

ARMs that were in place during the housing crash were what’s known as low-documentation or zero-documentation loans. That is the real difference between an adjustable-rate mortgage back in those days and one that you will be offered the days.

We learned much from the housing crash and it’s definitely reflected in the real estate industry now. All kinds of conventional loans, adjustable-rate mortgages, and fixed-rate mortgages, require full documentation. That means verified proof of income and a credit score that meets lending standards - among other things.

Buying a Home and Looking for a Mortgage?

Realtors need to be in touch with a network of lenders and financial advisors. If you’re in the market for a home in Santa Clara County, and you aren’t paying cash, we’ll connect you with lenders. We can also offer pre-approval for some home buyers in California. 

More Questions? Follow-up With Us!

If you have more questions about what to expect from the markets around the Bay Area, don’t be afraid to reach out to us today. Our experts are experienced in all property types and the entire San Francisco Bay Area, and we can help you to find what you need to know today.