"As the country reemerged from the coronavirus pandemic lockdown in 2021- when the COVID vaccine finally arrived, TikTok reached 1 billion downloads and Adele finally released new music - the housing market also saw its own interesting development. That year, banks offered some of the lowest interest rates seen in over a decade for a type of housing loan known as an adjustable-rate mortgage."
"ARM rates have gone up significantly since the pandemic - for example, the average rate for a 5/1 ARM (which promises a fixed interest for the first five years, then changes annually) stayed below 3% for almost all of 2021. Rates for that same kind of mortgage, as of this story's publishing time, have nearly doubled since then, with many lenders currently offering rates above 6%."
"According to data from the Mortgage Bankers Association, ARMs made up less than 5% of all home loan applications in 2021. That's a different picture from where the country was leading up to the 2008 financial crisis. Soon after the housing market collapsed, the Federal Reserve found that more than 75% of mortgages offered to borrowers with bad credit (the infamous "subprime mortgages") had been some type of ARM."
Adjustable-rate mortgages surged in popularity during 2021 when lenders offered historically low interest rates. The average 5/1 ARM remained below 3% for most of 2021 but has nearly doubled, with many lenders now offering rates above 6%. Borrowers with 5/1 ARMs will see fixed rates reset this year and could face substantially higher monthly payments. ARMs constituted under 5% of home-loan applications in 2021, reducing systemic exposure compared with pre-2008, when over 75% of subprime mortgages were ARMs. Many past ARM borrowers were financially unprepared for resets and experienced foreclosures.
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