Demand for riskier adjustable-rate mortgages hits highest level of the year

When mortgage rates rise, consumers look for a way to lower their monthly payments, often leading them to use adjustable rate mortgages (ARMs). These loans offer lower interest rates than their fixed-rate counterparts but are considered riskier. Although they can be fixed for a period of up to ten years, they end up adjusting to a future rate unknown to the market.

The share of ARM applications reached 7.8% of mortgage demand last week, according to the Mortgage Bankers Association. This is the highest level of the year. When mortgage rates hit record highs in 2021, the share of ARM applications was around 3%.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.29% last week from 7.24% the week before, with points decreasing to 0.65 from 0.66 (including origination fees) for loans. with a 20% deposit. Meanwhile, the average contract interest rate for 5/1 ARMs decreased from 6.64% to 6.60%.

“Inflation remains stubbornly high, and this trend convinces markets that rates, including mortgage rates, will remain high for longer. There is no doubt that this is a headwind for the real estate and mortgage markets, with the 30-year fixed mortgage rate increasing. to 7.29% last week, the highest level since November 2023,” said Mike Fratantoni, executive vice president and chief economist of MBA.

Overall demand for mortgages fell 2.3% last week from the previous week, according to the seasonally adjusted MBA index.

Home loan refinancing requests fell 3% for the week and were 1% lower than the same week a year ago. With rates 79 basis points higher than a year ago, homeowners have little incentive to refinance. Those looking to build equity in their home are more likely to do so through a second loan or line of credit, rather than giving up their current low rate.

Inquiries from potential buyers fell 2% for the week and were 14% lower than the same week a year ago.

Mortgage rates rose again earlier this week and will likely see more significant movement, either up or down, depending on interest rate comments from the Federal Reserve, which meets Wednesday.