Thousands of homeowners who took adjustable-rate mortgage loans (ARMs) five years ago are set to see their rates suddenly skyrocket as the initial offer they accepted expires and payments are adjusted based on current market conditions.
An estimated 1.7 million homeowners have bought homes with adjustable-rate mortgages since 2019, according to data from Intercontinental Exchange (ICE) first mentioned by CNN. A total of 328,000 of these loans have already reset, which means that the initial offer of a fixed rate has expired; another 102,000 will reset over the next 12 months, according to the ICE, which operates global financial exchanges.
Adjustable-rate mortgage loans—also called variable-rate mortgage or floating mortgages—are home loans that offer an initial, low fixed-rate for a period of several years, which normally ranges from five to seven or 10 years. After this fixed introductory period, the interest rate on the loan resets at regular intervals based on the performance of a specific benchmark.
These types of loans normally have a cap limiting how much the interest rate and payments can rise every year or for however long the loan lasts. However, essentially, ARMs are most convenient when rates are falling, while they can be risky for borrowers when rates increase. Depending on the state of the economy and the cost of borrowing, ARMs could be either cheaper or more expensive than a fixed-rate mortgage.
At the moment, mortgage rates are still hovering around the 7 percent mark, and the general cost of borrowing remains elevated; the housing market, after a modest price correction between late summer 2022 and spring 2023, remains widely unaffordable as prices rise.
As of July 25, the 30-year fixed mortgage interest rate was 6.78 percent, up 0.01 from a week earlier but down -0.03 from a year earlier, according to Freddie Mac. The 15-year fixed mortgage interest rate was 6.07 percent, up 0.02 from a week earlier and down -0.04 percent compared to last year.
Adjustment in the interest rates of ARMs could negatively impact thousands of homeowners and further strain affordability in the market. Jennifer Hernandez, a Houston resident who refinanced her home loan in 2016 using an ARM, told CNN that her mortgage payments jumped to about $2,000 per month last year.
“I’ve made it work, but now I’m going to have to figure out how to make it work again this October,” Hernandez said, adding that she expects payments will adjust higher again. “It’s stressful having to worry about it.”
A recent study by ATTOM Data Solutions found that a total of 177,431 homes in the U.S. had foreclosure filings between January and June, including default notices, scheduled actions, or bank repossessions. While that was down -4.4 percent from the same time period last year, it was up 7.8 percent from the same time period in 2022—suggesting that Americans are still struggling with affordability.
Are you a homeowner who took out an adjustable-rate mortgage loan in the past five or seven years? Has your rate changed? We want to hear from you. Contact [email protected].
Uncommon Knowledge
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