The share of borrowers applying for an adjustable-rate mortgage is the highest it’s been in 15 years, a new analysis by Zillow has found, but unlike the lead-up to the subprime mortgage crisis, these borrowers remain well-qualified.
The share of applications for ARMs rose to 12.6 percent in June before dipping slightly to 12.2 percent in July, according to economists at the listings portal. Those two months mark the first time the share of ARMs has risen above 12 percent since August 2007.
ARMs usually offer a lower interest rate than a standard 30-year, fixed-rate mortgage during the introductory period – ranging from three to 10 years – a boon to homebuyers in today’s high-rate, high-priced marketplace. The interest rate on an ARM loan can rise or fall after the introductory period expires, however, so the loans come with long-term uncertainty and may require refinancing down the line.
“Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession,” Zillow senior economist Nicole Bachaud said in a statement released along with the report. “It’s important not to confuse some added risk for an individual borrower with risk to the housing market as a whole. Borrowers today are more financially prepared for home buying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road.”
But unlike in the years before the 2007-2008 financial crisis, most of today’s ARM borrowers appear to be financially well-positioned to handle any spike in interest rates.
The median income of buyers who received an ARM loan was $165,000 in 2021, compared to $91,000 for all borrowers, Zillow reported. And the typical ARM borrower put 23.6 percent down – therefore making their total loan smaller – while the typical borrower overall put down 10 percent. Given this, and generally higher lending standards for all types of mortgages today, Zillow economists estimate it’s likely today’s typical ARM borrower would be able to withstand increased monthly payments if mortgage rates were to rise.
But the subprime crisis is creating at least one echo in today’s mortgage market: fewer Black borrowers are taking advantage of ARM’s benefits this time around. ARM loans approved for Black home buyers were for a median property value lower than for Black borrowers overall, Zillow found, a reversal from all other racial groups included in the analysis.
“Adjustable-rate and subprime loans disproportionately harmed Black homeowners during the foreclosure crisis,” Bachaud said. “Black mortgage applicants, then, have reason to be more risk-averse in their use of ARMs, particularly in a time like today when housing market conditions are changing so quickly. While the popularity of ARMs is rising and the potential benefits are greater for the right type of buyer, the data shows Black home buyers are less willing to accept the added risk after facing greater obstacles to qualify for a mortgage, another signal that lending is a long way from equitable.”
Zillow said this disparity is important because Black and Latinx homeowners were disproportionately harmed by the mid-2000s housing crash, and the Black homeownership rate has yet to recover, keeping the racial wealth gap wide.