What advantages do adjustable rate mortgages offer over fixed rate mortgages in times of increased inflation?

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With rising mortgage rates, more and more Americans are opting for 30-year variable rate mortgages, fixed rate loans as a way to save money in times of high inflation. But the strategy could backfire, depending on the terms and duration.

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ARMs accounted for 13% of all home loans by dollar volume in March — their highest percentage since January 2020, ABC News reported, citing data from CoreLogic. Meanwhile, the average weekly rate on a 30-year mortgage recently hit a 13-year high of 5.3%, according to Freddie Mac. It was 3% a year ago.

The rise in ARMs has continued over the past two months, said Robert Heck, vice president of mortgages at Morty, a mortgage services platform.

“We’ve seen a noticeable increase in demand for adjustable rate mortgages amid rising fixed rate mortgage rates,” Heck told GOBankingRates in an email. “The appeal of an ARM is that it offers lower initial interest rates than fixed rate mortgages, but it’s certainly not for everyone.”

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Lower rates mean lower monthly payments – a big draw in an economy where consumer goods prices are rising at their fastest pace in more than 40 years.

As GOBankingRates previously reported, the initial interest on an ARM is locked below the market rate for a period of one, five, seven, or 10 years. But the low initial rate, also known as the “hang rate”, does not last forever.

Once the rate begins to adjust, your payment may change based on market rates at the time, which are impossible to predict at the time of signing the loan. The adjustments could result in lower rates, but you also run the risk of facing much higher monthly payments each time the loan is reset.

Another challenge with ARMs is finding one to start with. As ABC News noted, the share of ARMs in all loans by dollar value fell to just 4% in January 2021, from 13% the year before. ARMs have accounted for 10% to 19% of all dollar loans over the past 12 years. Compare that to the height of the last housing boom in 2005, when ARMs were nearly 45%, according to CoreLogic.

“For consumers, ARMs are generally less available than fixed-rate options because not all lenders offer them,” Heck said. “In the secondary market, there is both less investor appetite and less liquidity for ARMs, which has contributed to ARMs being less competitive than their fixed-rate counterparts since 2008.”

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who has previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has won awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.

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