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. Many borrowers who had received an ARM were financially unprepared when their rates went up and ended up having their homes foreclosed.
Having fewer ARMs this time around is a relief for some experts like Vogel, who points out that even if many folks with ARMs fail to make their payments, the number of potential foreclosures will most likely not reach 2008 levels.
“We’re not going to see a financial crisis of that measure originate from ARMs,” he said, “but that is mostly because I could see a different, much stronger financial crisis arising from the overall increase in the cost of living and unemployment rate.”
I have an ARM and expect my rate to change this year. What should I know?
If you secured a 5/1 ARM in 2021, you should receive a notice from your lender this year before your rate actually changes. If you are worried about your ability to pay your new rate, talk with your lender as soon as you can, said Nikki Beasley, executive director of Richmond Neighborhood Housing Services, which helps prepare families in Alameda and Contra Costa counties for homeownership.
You should confirm with your banker or mortgage company the loan’s reset date — when your mortgage will switch from the initial fixed-rate to adjustable rates — along with the rate cap and floor, which limit how much your payments can actually change in one year. If your reset date doesn’t kick in until, say, November, where rates are then will be much more relevant than where they are currently in January.
“This is not the time to shut down, to have shame, be embarrassed or have fear,” Beasley said. “Be as transparent as you can be with your lender to say what you can do or what you can’t do.”
It’s helpful to share with your lender any changes to your job, income or personal spending habits that have come up since you first signed the mortgage, Beasley added. A housing counseling agency approved by the Department of Housing and Urban Development — like Beasley’s Richmond Neighborhood Housing Services — can also help you organize your budget and make a plan to avoid foreclosure. Find your nearest HUD-approved housing counseling agency.
One option you can also consider is refinancing — replacing your current loan with a new one, giving you the opportunity to secure a different rate or payment plan. In some cases, a borrower can even switch from an ARM to a fixed-rate mortgage, allowing for more stability in monthly payments.
“It’s important for the consumer to be really transparent with their lending specialist on what are the goals that they’re trying to achieve [with refinancing],” Vernon said. “Do they want lower payments? Do they have the need to access equity or cash? Do they want to shorten the term of their loan?”
Keep in mind that refinancing usually comes with closing costs — additional fees that you’re charged for switching over to a new loan. And just because you want a refinance doesn’t necessarily mean the bank will give you one.
“They may not qualify if their credit score is too low, they’re unable to verify income or their income has changed from what they had when they initially qualified for the loan that they have today,” Vernon said, adding that your financial objectives should also align with the new loan you’re seeking.
And if you’re in the difficult position of no longer being able to afford the home at all, also communicate that with your lender, recommended Beasley. “The sooner that you figure that out, you can then have a more graceful transition plan,” she said. “Maybe you are looking to sell, maximize the equity or get something smaller.”
“Be more proactive, so you are making this transition with grace, versus it being a very traumatic situation because you didn’t deal with the problem soon enough,” she added.
