Home equity loans, adjustable-rate mortgages, and other alternative loan products are gaining popularity as mortgage rates rise, but this time they look a lot different.

According to the Mortgage Bankers Association, applications for ARMs more than doubled in April from the year prior — a jump from 4% to over 9%.

ARMs are a popular option for today’s buyers because they have a much lower mortgage rate than fixed-rate loans for the first few years, experts say. 

After this time period, which usually is offered at five, seven, or 10 years, rates then begin to adjust to match certain benchmark rates.

ARMs, equity loans, and interest-only loans were among the more “risky” mortgage products that became nearly obsolete due to recent record-low mortgage rates.

Mortgages became affordable for many first-time borrowers who didn’t previously have the income or credit to apply, so these loan types became temporarily unnecessary.

Additionally, the reputation of these loan options precedes them. They remain residually unpopular with many types of borrowers following the foreclosure crisis over a decade ago.

Many first-time borrowers may not be aware of the impact, but for those who are, it’s become common to steer clear of these products to prevent the risk of losing their home as interest rates rise.

However, according to The Wall Street Journal, these loans today “bear little resemblance” to the ones blamed for fueling the 2008-09 financial crisis.

During that time, experts say lenders were enticing borrowers with low rates, and when the loans later reset, borrowers could not afford the payments.

Lending standards were also much looser, experts say.

Today, borrowers qualifying for these loans are “significantly different,” Pat Sheehy, chief executive of Hamilton Home Loans, told The Wall Street Journal.

Sheehy said Hamilton customers who are approved for variable-rate loans today have an average credit score of about 750.

According to CoreLogic, loan quality statistics for non-qualified mortgages, formerly known as subprime mortgages, line up well with those of traditional government-backed loans.

Non-QM loan products include bank statement loans, asset-based loans, jumbo loans, and interest-only loans that are not backed by the government.

What about home equity loans or HELOCs? Loose lending standards also hurt the reputation of these loans. 

Today, home equity lending is far more tightly regulated, experts say, and instead of creating a risk, they are a more affordable way for borrowers to tap into equity rather than refinancing and losing their current mortgage rate.

Mortgage marketing experts say it’s essential for lenders to look into these products and work to educate their customers on the options — including how they have changed from crises in the past.

Customers are largely unaware of their borrowing options when mortgage rates rise, experts say.

As a result, it’s important for lenders to reach out to the community and extend their expertise through content marketing such as blog posts, videos, and email marketing campaigns to find the clients who need them most.

Photo by Andrea Piacquadio