Adjustable-rate mortgages gain in popularity

More borrowers are opting for adjustable-rate mortgages (ARMs) in the years since the housing crisis, but today’s ARMs look different than the gimmicky loans of the past.

A study by the Federal Reserve Bank of New York found that ARMs were used for only 2.3 percent of home purchases, but that number had grown to four percent by last spring, the New York Times reported. In 1994, ARMs were used for approximately 70 percent of home purchases, according to the study.

The ARM of the past involved “teaser” rates that changed every six months, or features that allowed borrowers to pay less than monthly interest, resulting in a big bill later. These types of mortgages fueled the subprime mortgage boom and resulting increase in foreclosure rate, the New York Times report noted.

Today’s ARMs usually are “5/1” or “7/1” loans, lenders said. These types of mortgages have a fixed rate for the first five or seven years. After that, the rate is adjusted annually up to maximum cap.

Many banks are seeing an increase in this type of mortgage. Bank of America reported that it had twice as many ARMs last month as it did last year, and that ARMs now account for 10 percent of home loans. Freddie Mac said it expected ARMs to account for nine percent of home purchases this year.