If you remember when the housing market crashed in 2008, you might also recall how everyone was crazy about adjustable-rate mortgages (ARMs) at the time. Well, guess what? After being nearly extinct for years, ARMs are making a comeback as more folks are opting for them when buying a house. But hold up, before you start freaking out, let's take a closer look at why this is happening and why it's not as worrisome as it may seem.

Why ARMs Have Gained Popularity More Recently

This graph uses data from the Mortgage Bankers Association (MBA) to show how the percentage of adjustable-rate mortgages has increased over the past few years:

So, according to the graph, it looks like a lot more homeowners decided to go for adjustable-rate mortgages in the past year. In 2021, these mortgages made up around 3% of all the mortgages, but last year, that number went up by quite a bit. It's not that complicated to understand why this happened. Basically, mortgage rates shot up last year, meaning it was more expensive to borrow money. So, some homeowners thought, hey, why not go for an adjustable-rate mortgage instead? It offered them a lower rate compared to the traditional ones, which had high borrowing costs.

Why Today’s ARMs Aren’t Like the Ones in 2008

Let's think about it this way: these new loans we're talking about are not like those risky ARMs that were all the rage before 2008. The housing crash was partly caused by lenders being too lenient with their standards. Back then, when someone got an ARM, the banks and lenders didn't even bother asking for proof of their employment, assets, income, and all that stuff. Essentially, people were getting loans that they really shouldn't have been given. This put a lot of homeowners in a tough spot because they couldn't repay loans that they never had to qualify for in the first place.

So, here's the scoop: things have changed when it comes to lending standards these days. The banks and lenders have wisened up after the big crash and now they're really keeping tabs on your income, assets, employment, and all that jazz. In other words, if you're looking to get a loan, you gotta prove that you're qualified and can actually pay it back. No more taking chances!

““Around 60% of Adjustable-Rate Mortgages (ARM) that were originated in 2007 were low- or no-documentation loans . . . Similarly, in 2005, 29% of ARM borrowers had credit scores below 640 . . . Currently, almost all conventional loans, including both ARMs and Fixed-Rate Mortgages, require full documentation, are amortized, and are made to borrowers with credit scores above 640.””

— Archana Pradhan, Economist at CoreLogic

““Today’s Adjustable-Rate Mortgages are no riskier than other mortgage products and their lower monthly payments could increase access to homeownership for more potential buyers.””

— Laurie Goodman at Urban Institute

Bottom Line

If you're worried that today's adjustable-rate mortgages are just as risky as the ones we saw during the housing crash, let me put your mind at ease. I can assure you that things have changed this time around.

If you're a first-time homebuyer and want to know more about lending options that can help you tackle the affordability challenges we face today, just get in touch with a lender you trust. They'll be glad to assist you!