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I thought adjustable rate mortgages were pretty much dead after '08? Why would anyone get an ARM when rates were in the 3% range for a 30 year fixed mortgage (a

I thought adjustable rate mortgages were pretty much dead after '08? Why would anyone get an ARM when rates were in the 3% range for a 30 year fixed mortgage (as they were for several years until recently)?

grahamperich 4y ago
With rates climbing to 5%+ in the last couple months, a 3% ARM (with the hope they could refi to a low interest 30yr fixed before the ARM becomes adjustable) may have been attractive for some..
Kerrick 4y ago
Also worth noting: not all ARMs have a balloon payment. For example, I bought most of my farm on a 20yr ARM with a 20yr amortization. As interest rates rise I will have higher payments, but there’s no moment when the music stops and the rest of the principle immediately comes due.
- brewdad 4y ago
  There is still the risk of an interest rate reset raising the payment amount to an untenable level though. Maybe not in your specific case, depending on your circumstances, but for many others it will be true.
codefreeordie 4y ago
Before I gave up on buying a house this year, I was considering an ARM. Why? Because it meant I could qualify for an extra $100k, which gave me a better chance of being able to acquire a house. It didn't matter whether an ARM was better or worse in the long run, it mattered that the ARM could get the house and the fixed rate could not.
lkjfdslkjf222 4y ago
Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. Plenty of other reasons. Others have bad credit or otherwise get significantly lower payments on an ARM compared to fixed. I guess there are other reasons, but ARMs are definitely not dead. I don't know the numbers or where to get them though. What are more dead are the "balloon payment" residential mortgages where they may amortize over 30 years but the principal is due in 5 or 10 years.
- paulmd 4y ago
  > Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. you can pay off a 15-year mortgage in less than 15 years - the lien will be released, etc whenever the principal is paid. Everything depends on the specifics of your contract of course but it would be extremely unusual to have a mortgage where this is not allowed. fixed vs ARM purely depends on how the interest rate is determined, that's it. In principle ARM should be a bit lower than a fixed rate financed at the same time - but if the prime rate goes up then your rate goes up too, where with a fixed it's locked-in forever. Fixed will have a higher interest rate because someone has to assume that risk of an increase in the prime rate, where with an ARM that someone is you. Taking an ARM vs a fixed is a bet on whether rates are going to stay the same or decrease, vs increase. And boy if you thought 2020-2021 rates weren't going to increase at some point in the future, uh... it's not every day you have a once-in-a-century pandemic that nukes the economy and drives demand for money almost to zero. I'm not quite sure what you're saying about balloon payments either, the balloon payment happens at the end of a balloon mortgage, with the intention that values will have gone up so you can refinance at that point - but of course, what if they don't?
  - addaon 4y ago
    > Taking an ARM vs a fixed is a bet on whether rates are going to stay the same or decrease, vs increase It's also taking a bet on how long you're going to keep the mortgage. When a bank offers a lower rate for a 7 ARM vs 30 fixed, they're assuming that you will keep the mortgage for more than 7 years. If you pay it off fully before then, you win the bet.
  - fdjjjkffkk2 4y ago
    Eh, I think we're talking past each other because none of what you said really applies to what I think I'm saying. A 30year ARM gives you a lot more flexibility then a 15-year anything. I mean, you can pay off the 30 year in 30 years or 15 years or 5. Regarding the balloon payment-- not sure what you're missing here. Residential mortgages with balloon payments aren't really offered any more because of huge risk of default when the balloon payment is due.
dmitrygr 4y ago
Because ARMS were in the 2.x% range. I talked a number of people out of ARMs in '21 and '22 by explaining 2008 to them (they were 7-8 years old at the time, so do not remember). It is scary how bad most people are at understanding exponential growth and just how much worse 5% is than 3%
- bgirard 4y ago
  It's not exponential. And even though 5% is 66% higher than 3%, the monthly payment is $5,368 instead of $4,216 on 1m which is 27% higher. Sure you pay twice as much interest over 30 years.
  - NovemberWhiskey 4y ago
    It's absolutely exponential - it's just that the base is barely over one and the exponents involved are not very large.
  - brewdad 4y ago
    Do you think a typical homebuyer stretching themselves in the heated market of the past 2 years can easily absorb a 27% increase in their payment? I have my doubts.
  - sokoloff 4y ago
    How is a compounding loan (such as a mortgage) not exponential?
    - karpierz 4y ago
      Because you're paying it off faster than it grows. It would be exponential if you were allowed to simply let it sit without paying it down, but that would break the contract and get you foreclosed.
mgkimsal 4y ago
I went through 2 ARMs between 2013 and 2021. In both cases the 7 year ARM was at least 1.5 % below the traditional 30 year I could get. Between lender rebates and such, in both cases we had essentially $0 out of pocket and in both cases a moderately. In the last couple years, the ARMs I looked at were less than a single % from a traditional 30 year. I had last 3% ARM was adjusting in mid 2023, and I refi'd to a 30 year @ 2.75% last October. Holy tamole things have changed since then!
- scarface74 4y ago
  Alternate anecdote: I refinanced our house in 2020 and financed points and my interest rate is fixed at 1.87% for 15 years.
bgirard 4y ago
Say you take a 7 ARM at 2% instead of 3% for a 700k mortgage. You're saving $50,000 in interest during the first 7 years. That's 7% of your mortgage. Then 7 years of inflation can knock down your principle further which might be pretty high over the next 7 years. It can make sense if you're financially secure enough to take on the risk.
gnopgnip 4y ago
Something like 60% of homeowners would come out ahead financially with an ARM. You can save tens of thousands of dollars in interest before the rates adjust. Many people sell or refinance before the rates adjust, or soon after. The rate early on is a little more important because that is when the principal is highest, but in practice this isn't a huge factor. Only about 35% of the original principal is paid off after 10 years for a 5% mortgage. Even if rates go up and you stay there for 15-30 years, you could come out ahead because of how much lower the interest was for the first 5-7 years. But it depends on how much rates go up. But the long tail is some people being priced out of their home as their payment rises, and it could have been prevented. So 90-95% of mortgages in the US are fixed rate.
caeril 4y ago
Same reason very intelligent fund managers are buying 10y TSYs yielding 2.8% despite inflation giving them a NEGATIVE 5.2% real yield: Everyone thinks that 5 years out, everything will be rosy. The metalworker saving 0.6% on a 5/1 ARM vs a fixed 30yr is using the same mental gymnastics that J. Poindexter on Goldman's bond desk is, that central banks are omniscient, omnipotent, and will always magic away the risk inherent in our decisions.

grahamperich 4y ago

With rates climbing to 5%+ in the last couple months, a 3% ARM (with the hope they could refi to a low interest 30yr fixed before the ARM becomes adjustable) may have been attractive for some..

Kerrick 4y ago

Also worth noting: not all ARMs have a balloon payment. For example, I bought most of my farm on a 20yr ARM with a 20yr amortization. As interest rates rise I will have higher payments, but there’s no moment when the music stops and the rest of the principle immediately comes due.

brewdad 4y ago
There is still the risk of an interest rate reset raising the payment amount to an untenable level though. Maybe not in your specific case, depending on your circumstances, but for many others it will be true.

codefreeordie 4y ago

Before I gave up on buying a house this year, I was considering an ARM. Why? Because it meant I could qualify for an extra $100k, which gave me a better chance of being able to acquire a house. It didn't matter whether an ARM was better or worse in the long run, it mattered that the ARM could get the house and the fixed rate could not.

lkjfdslkjf222 4y ago

Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. Plenty of other reasons. Others have bad credit or otherwise get significantly lower payments on an ARM compared to fixed. I guess there are other reasons, but ARMs are definitely not dead. I don't know the numbers or where to get them though. What are more dead are the "balloon payment" residential mortgages where they may amortize over 30 years but the principal is due in 5 or 10 years.

paulmd 4y ago
> Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. you can pay off a 15-year mortgage in less than 15 years - the lien will be released, etc whenever the principal is paid. Everything depends on the specifics of your contract of course but it would be extremely unusual to have a mortgage where this is not allowed. fixed vs ARM purely depends on how the interest rate is determined, that's it. In principle ARM should be a bit lower than a fixed rate financed at the same time - but if the prime rate goes up then your rate goes up too, where with a fixed it's locked-in forever. Fixed will have a higher interest rate because someone has to assume that risk of an increase in the prime rate, where with an ARM that someone is you. Taking an ARM vs a fixed is a bet on whether rates are going to stay the same or decrease, vs increase. And boy if you thought 2020-2021 rates weren't going to increase at some point in the future, uh... it's not every day you have a once-in-a-century pandemic that nukes the economy and drives demand for money almost to zero. I'm not quite sure what you're saying about balloon payments either, the balloon payment happens at the end of a balloon mortgage, with the intention that values will have gone up so you can refinance at that point - but of course, what if they don't?
- addaon 4y ago
  > Taking an ARM vs a fixed is a bet on whether rates are going to stay the same or decrease, vs increase It's also taking a bet on how long you're going to keep the mortgage. When a bank offers a lower rate for a 7 ARM vs 30 fixed, they're assuming that you will keep the mortgage for more than 7 years. If you pay it off fully before then, you win the bet.
- fdjjjkffkk2 4y ago
  Eh, I think we're talking past each other because none of what you said really applies to what I think I'm saying. A 30year ARM gives you a lot more flexibility then a 15-year anything. I mean, you can pay off the 30 year in 30 years or 15 years or 5. Regarding the balloon payment-- not sure what you're missing here. Residential mortgages with balloon payments aren't really offered any more because of huge risk of default when the balloon payment is due.

dmitrygr 4y ago

Because ARMS were in the 2.x% range. I talked a number of people out of ARMs in '21 and '22 by explaining 2008 to them (they were 7-8 years old at the time, so do not remember). It is scary how bad most people are at understanding exponential growth and just how much worse 5% is than 3%

bgirard 4y ago
It's not exponential. And even though 5% is 66% higher than 3%, the monthly payment is $5,368 instead of $4,216 on 1m which is 27% higher. Sure you pay twice as much interest over 30 years.
- NovemberWhiskey 4y ago
  It's absolutely exponential - it's just that the base is barely over one and the exponents involved are not very large.
- brewdad 4y ago
  Do you think a typical homebuyer stretching themselves in the heated market of the past 2 years can easily absorb a 27% increase in their payment? I have my doubts.
- sokoloff 4y ago
  How is a compounding loan (such as a mortgage) not exponential?
  - karpierz 4y ago
    Because you're paying it off faster than it grows. It would be exponential if you were allowed to simply let it sit without paying it down, but that would break the contract and get you foreclosed.

mgkimsal 4y ago

I went through 2 ARMs between 2013 and 2021. In both cases the 7 year ARM was at least 1.5 % below the traditional 30 year I could get. Between lender rebates and such, in both cases we had essentially $0 out of pocket and in both cases a moderately. In the last couple years, the ARMs I looked at were less than a single % from a traditional 30 year. I had last 3% ARM was adjusting in mid 2023, and I refi'd to a 30 year @ 2.75% last October. Holy tamole things have changed since then!

scarface74 4y ago
Alternate anecdote: I refinanced our house in 2020 and financed points and my interest rate is fixed at 1.87% for 15 years.

bgirard 4y ago

Say you take a 7 ARM at 2% instead of 3% for a 700k mortgage. You're saving $50,000 in interest during the first 7 years. That's 7% of your mortgage. Then 7 years of inflation can knock down your principle further which might be pretty high over the next 7 years. It can make sense if you're financially secure enough to take on the risk.

gnopgnip 4y ago

Something like 60% of homeowners would come out ahead financially with an ARM. You can save tens of thousands of dollars in interest before the rates adjust. Many people sell or refinance before the rates adjust, or soon after. The rate early on is a little more important because that is when the principal is highest, but in practice this isn't a huge factor. Only about 35% of the original principal is paid off after 10 years for a 5% mortgage. Even if rates go up and you stay there for 15-30 years, you could come out ahead because of how much lower the interest was for the first 5-7 years. But it depends on how much rates go up. But the long tail is some people being priced out of their home as their payment rises, and it could have been prevented. So 90-95% of mortgages in the US are fixed rate.

caeril 4y ago

Same reason very intelligent fund managers are buying 10y TSYs yielding 2.8% despite inflation giving them a NEGATIVE 5.2% real yield: Everyone thinks that 5 years out, everything will be rosy. The metalworker saving 0.6% on a 5/1 ARM vs a fixed 30yr is using the same mental gymnastics that J. Poindexter on Goldman's bond desk is, that central banks are omniscient, omnipotent, and will always magic away the risk inherent in our decisions.