Millennials: ARMed and Ready

Adjustable-rate Mortgages: The New Millennial Trend?

In a previous video blog, we discussed crucial differences and considerations when it comes to choosing an Adjustable-Rate-Mortgage (ARM) versus a fixed-rate mortgage. A recent article from The Wall Street Journal shed some light on how Millennials are progressively opting for ARMs as opposed to the standard fixed-rate mortgages. While ARMs account for less than 5% of new mortgages, this market share is expected to grow due to its practicality among Millennials. As highlighted in a prior blog post, Millennials still believe owning a home is part of the “American Dream” despite facing a higher debt burden, higher credit standards, and lower starting salaries as compared to baby boomers.

A Risk Millennials Are Willing to Take

ARMs can cost you an arm, as they usually come with considerable risks. They often feature lower initial rates and monthly payments as compared to fixed-rate mortgages. However, ARMs allow for rate increases depending on the respective index rate, which could lead to a higher monthly payment for the borrower should the rate go up. This is important given the possibility of rate hikes in our near future, as we previously discussed. However, rates may also decrease, which could result in a lower monthly payment without the need to refinance. This is not a feature of fixed-rate mortgages, where the rate does not change.  By the same token, the fixed rate tends to be higher than the initial ARM rate.

The Mobility Factor

Although they are associated with rate fluctuations, ARMs are beneficial to millennial homeowners who expect to be on the move as they pursue different career opportunities. For these folks, the initial cost-savings of ARMs enable them to reap the rate savings without running the risk of rate increases in the following years. While fixed-rate mortgages would prevent such a risk in the first place, borrowers can strategically plan an ARM and secure their interests by finding their “sweet spot.” A borrower has multiple options in their arsenal, namely fixed-rate provisions ranging from three to ten years, which can be chosen depending on how soon the borrower plans to sell the property.

From the trenches,

Roy Oppenheim