Couple this with rising home prices due to a supply shortage that is also unlikely to change in the near term, and the costs of buying a home have arguably never been greater than they are today. Price-to-income (PTI) is a measure of the ratio of the average home price to the annual median income and a key indicator of housing affordability. After decades hovering close to 2.0, the PTI for a homebuyer hit 3.0 in the lead-up to the Great Recession. It dropped back below 3.0 for most of the 2010s but hit a peak of 5.0 in 2022 and remains at 4.8 even today. That means the average American now spends nearly five times their annual household income just to purchase a home in this country.

So once the borrower is given a transparent overview of rates and is still interested in purchasing a home, what should you tell them to consider? The first thing we would advise is considering an Adjustable-Rate Mortgage (ARM). After the 2008 financial crisis, ARMs were viewed unfavorably because many borrowers could not afford their new rate after it was adjusted to the market index. So, what has changed that would make a borrower want to re-assess the value proposition of an ARM?

First, the ARMs blamed for causing the Great Recession contained teaser rates, negative amortizations and large pre-payment penalties – all of which were outlawed with the passage of the Dodd-Frank Act. Second, the borrower will benefit by locking in a rate below the 30-year FRM for a pre-determined amount of time. Most ARM’s will hold their initial rate for three to five years (and sometimes even seven or 10) before adjusting. For buyers with growing families or buyers who move frequently, i.e. service men and women, doctors, corporate executives, etc., they could experience the benefits of a lower rate and then sell before the adjustment. The lower interest rate also helps them build equity faster, meaning more windfall when they do sell.

For borrowers who choose not to sell their home before their rate adjusts, there’s a good chance they could even see a rate reduction if the benchmark it is tied with also falls. If the benchmark were not to fall, there are hard caps that safeguard against how high the mortgage rate can adjust.

Some will argue that they don’t want an ARM because they don’t want to pay closing costs to refinance when rates drop. A good retort is, “Are you not going to refi a 7% 30-year FRM when rates drop?” The borrower is likely going to pay closing costs to refinance regardless of whether they take the ARM or FRM – they might as well save some money while they wait for rates to drop. If you want, you can even offer no or reduced closing costs on a future fixed-rate refinance to any borrowers choosing an ARM now as an incentive to stay with your credit union.

ARMs aren’t just good for borrowers, either. Credit unions benefit from increased loan volume and reduced interest rate risk. Independent mortgage brokers now control close to 80% of the mortgage market. You know what almost no IMB can offer to borrowers? ARMs. Jumbo loans. Construction loans. Bridges, blankets and lot loans. Portfolio products. Anyone can offer a 30-year FRM, which leads to a race to the bottom on pricing. But without a balance sheet and liquidity, there is far less competition and greater margins in portfolio lending. What is better than helping your members achieve their dreams of homeownership and making money while doing it?

Deciding on the right loan product is an important decision that can be overwhelming. Before a borrower decides, they should review all their options with an experienced loan originator who can walk them through their options before making the best decision for their financial situation. And if your credit union is not offering ARMs to members, you should reconsider.