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5-Year ARM Loans Mature Causing Mortgage Payments to Increase

Americans who purchased a home in 2019 using an adjustable-rate mortgage (ARM) loan that locked in a lower, short-term rate are expected to see a substantial increase in mortgage payments as their loan term ends this year. For some, mortgage payments could double as interest rates rise to match the current market conditions.

This adjustment occurs at a time when inflation is already straining household budgets, making it challenging for many to afford necessities and manage their bills. Because of this, and the fact that many are living paycheck to paycheck, it’s not unreasonable to anticipate that some homeowners may not be capable of making higher monthly mortgage payments.

Maturing ARM Loans Responsible for Inevitable Increase in Mortgage Payments

While adjustable-rate mortgages usually provide lower initial rates, the reduced rate is typically only available for three to ten years. After this period, borrowers might need to refinance at current market rates. For instance, millions of homeowners with 5-year ARM loans initially secured at a rate of around 3.5% in 2019, could potentially see their rates rise to approximately 6.5%. This increase represents a significantly higher monthly payment, which many individuals won’t be able to afford.

Chief Financial Analyst at Bankrate, Greg McBride, discusses this situation with a higher potential rate in mind. “A borrower that took an adjustable rate mortgage and neglected to refinance when fixed mortgage rates were at record lows in 2020-2021 are paying for that now. With the Federal Reserve having pushed interest rates up at the fastest pace in 40 years, a borrower facing an ARM adjustment now could see their rate jump to 8 [percent].”

Homeowner’s Worries Increase After Recent Mortgage Rate Hike

Last week, mortgage rates dipped to 6.94% on May 23rd. However, Freddie Mac reported a recent spike in rates for the week ending May 30th, recorded at 7.03%. This increase could further dampen the hopes of homeowners with a 5-year ARM loan maturing this year.

Related Article: Mortgage Rates Fall Below 7% – Investors Grab Available Properties to Lock in Lower Rates

30-Year Fixed Mortgage Rates – May 30, 2024

Increase in Mortgage Payments – Adjustable Rate Mortgage ARM

Data from Bloomberg illustrates the potential increase in payments once the 5-year home loan period reaches maturity.

They state that in 2019, the average size of five-year adjustable-rate mortgages was approximately $791,100, with an interest rate of 3.3%, resulting in a monthly payment of around $3,465. According to Bankrate, current five-year ARM rates have surged to about 6.5%, nearly twice the previous rate. As a result, homeowners renewing their policies could face monthly mortgage payments that are $1,000 or more higher than before.

Increase in Mortgage Payments Will Push Homeowners into the Rental Arena

Because Americans are currently facing the expiration of favorable loan terms that switches them to a higher rate and increased monthly mortgage payments, their dream of homeownership could be jeopardized by either having to sell or going into default.

This scenario is based on the fact that a considerable hike in monthly housing expenses, coupled with high inflation, could stretch finances to the breaking point. This financial strain will most likely force a great number of homeowners to sell their houses and turn to renting a property instead.

Renting could be a wise move for some, as revealed in an Affordability Report by ATTOM. The report stated that renting a medium three-bedroom home is more affordable than owning an equivalent property in 90% of local markets across the United States.

Related Article: Renting More Affordable Than Buying Indicating Financial Security for Investors

Real Estate Investors Benefit from Increased Demand for Rentals

As it stands, there’s a growing likelihood that many homeowners will turn to the rental market because their mortgage payments will become unmanageable. Along with this, prospective homebuyers who feel they will never be able to buy a home are choosing to rent due to the ongoing affordable housing crisis and the limited number of properties available. The end result is that the demand for rental properties is through the roof, causing a rental shortage that pushes rent prices up.

In this particular situation, real estate investors are on the other side of the financial spectrum. Why is this the case? Owning a rental property at this time ensures low vacancy rates, high rents, and increased property values from continued skyrocketing home prices. In addition to this, real estate is a hedge against inflation that can shield an investor’s wealth. This all makes owning rental real estate a lucrative investment opportunity during economically challenging times.

Related Article: Why Rental Properties are a Safe Investment During Times of High Inflation

If you’d like to enter the housing market by investing in a high-demand, income-producing rental property, feel free to schedule a 30-minute phone call with the team at Morris Invest. We specialize in new construction properties and manage every step of the process to provide our clients with cash-flowing rentals.

Before you go, be sure to watch the following video that touches on the startling facts of just how unaffordable it is to own a home:

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