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)?
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.
It can make sense if you're financially secure enough to take on the risk.
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.
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%
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.
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?
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.
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.
It can be a very good idea for someone who plans to pay off their mortgage early. If all goes well it is no worse than a 15 year mortgage, but when (really, if is unlikely) something bad happens you have more flexibility. Of course if interest rates go up you will get burned, which is why I go with a 30 year fixed rate that I pay off. I could probably afford payments on a 15 year loan, but I'm not willing to risk it.
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.