Weathering Increase
Borrowers like Baudler say they don’t have to worry where home prices will be when their loans adjust. He has the assets to weather rate changes at the end of his seven-year fixed period and plans to use his mortgage savings to pay off the loan in nine years. It was a cheaper alternative to using a 15-year fixed mortgage, he said.
“I’d rather put that money into paying off my house, and have the safety of that, rather than put it into the stock market and risk what happened in 2008,” he said.
With fixed rates projected to gain through the next two years, ARMs will underpin about one-tenth of the market, according to Freddie Mac. That will enable some people to buy a bigger home with an ARM they couldn’t have gotten with a fixed, said Savage.
“Sometimes it’s a tough choice to go for the fixed rate when you know you could buy a bigger and better house with an ARM,” Savage said. “It’s the same dilemma we saw before the housing crash.”
Financially Sound?
A 1 percent change in fixed rates means home shoppers who last month qualified for a $400,000 house may now have to look at properties priced around $350,000.
While moving to an ARM helps them purchase the more expensive property, when the loan adjusts the interest rate on a typical ARM could go as high as 8.5 percent.
“When people want a bigger house for their families and they’re sitting across from loan officers in suits assuring them an adjustable is a financially sound choice, it’s not surprising a lot of people believe it,” said Jay Westbrook, a law professor at the University of Texas.
No one can predict the future rate environment with assurance, including homebuyers, he said.