Adjustable-Rate Mortgages on the Rise?

During the housing boom, the adjustable-rate mortgage was the loan of choice. These loan products typically offer buyers a lower rate for a set number of years, with rates that rise or drop each subsequent year following current interest rates. During the financial crisis, however, the rates didn’t outshine those of a fixed-rate mortgage and therefore fell out of favor.

Adjustable-Rate Mortgages on the Rise?

Today, interest rates are near historical lows, and so the adjustable-rate mortgage is looking very appealing for borrowers comfortable enough to gamble that interest rates will remain low—or at least believe they will be able to sell before rates rise.
Since economists forecast a rise in interest rates in the coming years, adjustable-rate mortgages make the most sense for those who expect to be in their homes for a short period.

An adjustable-rate mortgage that carries a five year fixed-rate and thereafter adjusts every year is currently 3.4%, almost half a percentage point lower than the rate in January. Conversely, the average 30-year fixed-rate mortgage is 4.72%, which amounts to just 0.22 percentage points lower than January. This spread is actually large enough to amount to thousands of dollars in savings on mortgage payments in the first five years.

This means that at current rates a borrower with a 5-year, $500,000 adjustable mortgage rate will pay about $85,000 in interest over the first five years, while a borrower with a 30-year fixed-rate mortgage would pay around $115,000 during the same period.
One thing to bear in mind is that this spread which would make an adjustable-rate mortgage attractive is only the result of low demand. The historical average is 0.59 percentage point.