Blog posted On April 04, 2019
Earlier this quarter, the Mortgage Bankers Association (MBA) reported the average size of a fixed-rate mortgage nationwide was $280,900 and the average size of an adjustable-rate mortgage nationwide was $688,400. A fixed-rate mortgage will retain the same interest rate throughout the term of the loan, whereas an adjustable-rate mortgage will fluctuate based on market conditions and other factors. Adjustable-rate mortgages typically have a lower introductory interest rate than fixed-rate mortgages of the same size and terms and may be a more affordable option for homeowners who plan to move or refinance the loan after a few years.
Adjustable-rate mortgages will have a fixed interest rate for anywhere from three to ten years, depending on the total term of the loan. This rate will typically be lower than the rate on a fixed-rate year loan. Once the introductory period expires, the rate may increase or decrease based on market conditions. An adjustable-rate mortgage will have “rate caps” that control how much the rate can increase over time. A “subsequent adjustment cap” will limit how much the interest rate can increase each adjustment period. This cap will most commonly be two percentage points but may vary from situation to situation. A “lifetime adjustment cap” will limit how much the interest rate can increase during the life of the loan. This cap will typically not exceed 5 percentage points, but again this varies based on the lender and the borrower’s financial situation.
Some may fear an increase in the size of adjustable-rate mortgage originations is reminiscent of the early 2000s, however that is not the case today. The lending landscape of 2019 is vastly more responsible than the practices that took place almost twenty years ago. Stricter underwriting and more stringent qualifying guidelines protect today’s borrower and mortgage lenders. MBA chief economist, Mike Frantantoni, noted that adjustable-rate mortgages almost always carry a higher balance than fixed-rate mortgages, explaining that adjustable-rate borrowers tend to be more tolerant of interest rate risk because they have higher incomes that fixed-rate borrowers. Plus, adjustable-rate mortgages only make up a single-digit percentage of total mortgage originations nationwide, compared with the 35% share they comprised in the early 2000s.
An adjustable-rate mortgage may make sense for you if you are planning to move and sell your home within the first few years. An adjustable-rate mortgage will typically have a lower monthly payment than a fixed-rate mortgage during the initial period. The best way to find out if an adjustable-rate mortgage is right for you is to meet with a loan officer to discuss your financial goals and compare loan scenarios.