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The new ability-to-repay rule announced last week by the Consumer Financial Protection Bureau will make it more difficult for borrowers to obtain the popular adjustable-rate mortgages.
Under the rule, which takes effect next January, lenders will be required to factor in the ARM's fully indexed rate rather than the lower introductory rate when determining whether a borrower qualifies for the mortgage. Though some lenders already do that prior to approving a loan, it will be required of all lenders next year.
A fully indexed rate is the current interest rate of the ARM plus the rate of the index. The CFPB has tightened standards for all mortgages in an effort to avoid the easy lending that led to the housing crash.
ARMs grew in popularity over the years because for an initial period, the interest rate is lower than it is on a fixed-rate mortgage. But the borrower can end up paying much more in interest after the initial period runs out, making an ARM better-suited to the short term. On a 5/1 ARM, the interest can increase by as much as 5 percent in the sixth year and 2 percent a year after that, though there is a cap on total interest over the lifetime of the loan.
Read more details about the new rule in this mortgage blog.
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