The size of the national average fixed-rate residential loan recently was $280,900. The size of the average adjustable-rate loan was $688,400 – two and a half times as big. That data point, courtesy of the Mortgage Bankers Association, is a reminder that the industry still offers products that make it affordable to get people in the door, with the intention of refinancing later. Experts aren’t really surprised. ARMs have always carried larger balances, the MBA’s chief economist, Mike Fratantoni, pointed out, in order to help those struggling to afford costly homes, “but there are times when we see them move even higher.”
But even though it’s not a surprise, the reasons behind the trend can feel unsettling. “I think there is still a desire to use the product which is going to get you into the home and then maybe there may be an opportunity to refinance into a fixed-rate later,” Fratantoni told MarketWatch. Fratantoni also notes that higher-income borrowers may be more tolerant of a little interest-rate risk, whereas those in the lower tiers of the market and first-time buyers generally “value the stable payment that a fixed-rate loan provides.” Fratantoni stresses that the ARMs of today aren’t those of a decade ago. Underwriters must now make sure borrowers can afford any monthly payment during the life of the loan, even if the rate resets, because of changes introduced by the Dodd-Frank bank reform law.
Source: Market Watch