Mortgage rates jump above 4% — prompting borrowers to return to a staple of the housing bubble
CBSN
It's increasingly expensive to buy a home: Not only are housing prices increasing by double-digits annually, but mortgage rates have been on the rise and this week topped 4% for the first time since May 2019. That's pushing more buyers to take out adjustable-rate mortgages — one of the financial products blamed for the 2006 housing crisis.
The share of mortgages that are adjustable-rate mortgages (ARMs) doubled to 10% in January, up from a 10-year low of 4% in January 2021, according to data from CoreLogic. ARMs offer an initial low rate for a period of years — typically anywhere from three to 10 years — and then the rate adjusts after that, usually annually, based on a fluctuating benchmark rate plus an additional margin, such as 2%.
The reason for the resurgence in interest in ARMs is clear: These loans offer an initial rate that's far lower than a conventional 30-year mortgage. For instance, the average initial rate for a 5/1-year ARM (an ARM that is fixed for five years, and then resets every year after that) stands at 3.19% — almost one percentage point lower than the 4.16% current rate for 30-year mortgage, according to Freddie Mac. But of course, once that five-year initial rate expires, buyers can get hit with a higher rate — such as 5.19% instead of 3.19%.
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