Millennials Seem to Like Adjustable Rate Mortgages
A new anecdotal report from the WSJ reveals that Millennials who are buying homes are increasingly choosing adjustable-rate mortgages to get the job done. While the data isn’t definitive by any stretch, John Walsh, the chairman of a large mortgage lender by the name of Total Mortgage Services, told the publication that interest in 7/1 ARMs jumped 18% from a year ago.
He tells the WSJ that these home buyers aren’t “going to work at GE for the next 30 years,” which explains why they would choose an ARM instead of a fixed-rate mortgage.
[See the latest mortgage rates from dozens of lenders, updated daily.]
In a word, they’re “mobile.” The argument is basically that they won’t be staying in the home for 30 years, and as such won’t be keeping the mortgage very long either.
It Doesn’t Take Long to Outgrow a Home
It’s a pretty safe bet to make because these first-time buyers will likely outgrow their homes within a decade or less, especially if they advance in their careers and increase their purchasing power (and start families). Of course, that’s the simple way of looking at it. We could have made the same argument about 10 years ago.
Back in 2006, a young home buyer could have (and probably did) take out an ARM because they didn’t plan on staying in their home for more than say five years. Or they just serially refinanced because they could. But just a few years later, they were essentially trapped in their homes thanks to plummeting home prices.
The lack of home equity meant they couldn’t sell or refinance into a fixed-rate mortgage, so they were stuck with an ARM they never expected to keep past its first adjustment.
Ironically, many of these ARMs actually fell in price (rate) because associated mortgage indexes also sank during the crisis, giving these risky borrowers the surprise gift of a lower monthly payment.
Now it may not go down that way again (let’s hope not), but it easily could turn into a situation where mortgage rates rise significantly during the ARMs initial fixed period.
After the seven years are up on a 7/1 ARM, and the first adjustment takes place, the borrower could see their monthly payment skyrocket (within the initial caps allowed).
To continue reading click here!