MARY LOUISE KELLY, HOST:
For any American who lived through the housing crash, there's a certain type of mortgage that will send a shiver down the spine. It's called an adjustable-rate mortgage. But with interest rates as stubbornly high as they are right now, some people are reconsidering them. Our colleagues at The Indicator from Planet Money, Wailin Wong and Adrian Ma, tell us why.
WAILIN WONG, BYLINE: If you have a mortgage, chances are you have a fixed rate - one rate that stays the same for the life of the loan. The 30-year fixed rate mortgage reigns supreme in the U.S. We're actually the only country where this is the most popular kind of home loan.
ADRIAN MA, BYLINE: The fixed rate mortgage isn't the only choice though. You could also get an adjustable-rate mortgage, or ARM. These are way less popular, only about 5% of mortgages in the U.S.
WONG: ARMs embody a lot of terrifying memories for people who lived through the housing crisis. This type of loan accounted for about a third of all mortgages that originated during the run-up to the housing bubble. Adjustable-rate mortgages come with an introductory teaser rate that's usually a little lower than the prevailing fixed rate. Then after a certain amount of time, the interest rate resets at wherever the market is.
MA: In the early 2000s, predatory lenders pushed novel kinds of ARMs on people with low incomes and bad credit. Loose underwriting standards meant that they got approved for these loans based solely on whether they could afford the low teaser rate. According to analysis from Duke, the delinquency rate for conventional ARMs was double that of fixed rate mortgages at the peak of the subprime crisis.
WONG: Regulators did put in more safeguards for ARMs after the financial meltdown. Today, you have to qualify for a rate that's well above the teaser rate. Still, ARMs carry a lot of stigma for people. Chen Zhao is the head of economics for Rocket Mortgage and Redfin.
CHEN ZHAO: A lot of times when people are thinking about, oh, the rate might adjust, you naturally go to this place where, oh, the rate might adjust upward, and that is kind of scary, right?
WONG: But rates could also reset lower, and in fact, that's what they've done in recent history. Chen and her colleagues at Redfin recently analyzed data going back to 1971. They looked at every year and asked...
ZHAO: If you had chosen an ARM versus the 30-year fixed, would you have had an opportunity to refinance your ARM into a lower rate?
MA: And here's what Chen found. About 70% of the time, people with adjustable-rate mortgages had at least one shot at getting a lower rate.
ZHAO: What this is telling you is that over this, like, long stretch of time, for the most part, ARMs made sense.
MA: So interest rates broke in their favor.
WONG: Yeah, it worked out most of the time - right? - 70% of the time. Now, people with fixed rate mortgages could also have refinanced their loans at lower rates, but that process comes with additional costs.
MA: Now, before you call up your mortgage broker, there are two big caveats to keep in mind. No. 1, that 40-year period where rates got low, that could have been a historical anomaly. The second big caveat is that borrowers are human beings. It's one thing to look at a spreadsheet and say, OK, history has shown ARMs to be the more cost-effective option. It's another to actually sign your name on a loan contract.
ZHAO: It's not just about the numbers and the black and the white. It's a lot about emotions too.
WONG: So ARMs do have their appeal, but it's not broad.
MA: For most homeowners, they want the certainty of knowing exactly what their monthly payments are going to be. And for them, that's worth paying a little extra for.
WONG: Wailin Wong.
MA: Adrian Ma, NPR News.
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