Zillow: ARM borrower profile stronger than that of a typical borrower

Adjustable-rate mortgages (ARMs) are growing more commonplace as borrowers seek cheaper funding alternatives in today’s high-price, high-rate environment. But a recent Zillow study has found that it’s not only buyers on the affordability threshold who are opting for these products.

Zillow revealed that homebuyers who recently selected an ARM for their home purchase have higher median incomes and put more money down than the average buyer. The median income of buyers who financed with an ARM was $165,000 in 2021, compared to a median of $91,000 for all buyers. And the typical ARM borrower made a 23.6% downpayment, while the average borrower put down 10%.

It’s a far cry from the state of things during the subprime mortgage crisis, when many predatory loans were structured similarly to ARMs in that monthly payments started affordably before jumping to high levels in later years. But with more regulations in place and lending standards now much more stringent, the profile has changed.

“Housing-market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession,” Zillow senior economist Nicole Bachaud said. “It’s important not to confuse some added risk for an individual borrower with risk to the housing market as a whole.

“Borrowers today are more financially prepared for homebuying, and the housing market has a much stronger outlook than the last time ARMs were this popular. While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road.”

ARM borrowers in Zillow’s analysis also bought more expensive homes than the typical borrower. The median property value for ARM borrowers was $565,000, compared to $325,000 for the overall borrower population

Zillow’s study also dove deeper into the demographics of ARM borrowers today compared to ARM borrowers during the housing crisis of the late 2000s. In particular, Bachaud noted that ARM loans given to Black homebuyers had a median property value lower than that of the overall Black buyer population. Black borrowers were the only racial group in Zillow’s study for whom this was the case.

“Adjustable-rate and subprime loans disproportionately harmed Black homeowners during the foreclosure crisis,” Bachaud said. “Black mortgage applicants, then, have reason to be more risk-averse in their use of ARMs, particularly in a time like today when housing-market conditions are changing so quickly.

“While the popularity of ARMs is rising and the potential benefits are greater for the right type of buyer, the data shows Black homebuyers are less willing to accept the added risk after facing greater obstacles to qualify for a mortgage, another signal that lending is a long way from equitable.”


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