Demand for adjustable-rate mortgages hits 14-year high as buyers try to afford expensive spring market

A newly sold home is shown in Houston, Texas.

Brandon Bell | Getty Images

It could be more listings on the market, or maybe just the fear that interest rates will rise even more, but home buyers are showing greater demand for mortgages. However, they are turning even more to adjustable rate mortgages (ARMs), which offer lower rates. This gives them an edge as rates and house prices continue to climb.

Mortgage applications to buy a home rose 5% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was still 8% lower than the same week a year ago, but that annual decline is now diminishing.

The average contractual interest rate for 30-year fixed rate mortgages with conforming loan balances ($647,200 or less) increased from 5.36% to 5.53%, with points rising from 0, 63 to 0.73 (including origination fees) for loans with a 20% decline. Payment. The rate on a 5-year ARM was 4.47%.

“Despite a slow start to the home buying season in the spring of this year, potential buyers are showing some resistance to higher rates. Buying activity has now increased for two straight weeks,” MBA economist Joel Kan said in a statement. “More borrowers continue to use ARMs to fight rising rates. The share of ARMs has grown to 11% of all loans and 19% in dollar volume.”

At the start of this year, when rates were still hovering near record lows, ARM’s share was just 3% of all buy orders. At 11%, this is the highest share since March 2008.

ARMs offer lower rates that can be fixed for terms such as five, seven or 10 years. ARMs are fully underwritten like fixed rate mortgages, and they require a down payment. This was not the case in the early 2000s, when poorly underwritten, interest-only ARMs with short teaser periods were blamed for the epic real estate crash.

While buyers are showing more interest, current owners are less interested in refinancing. These requests were down another 2% week-over-week and were 72% lower than a year ago. There simply remains a very small pool of borrowers who can benefit from refinancing at current interest rates. Refinancing generated record profits for lenders during the early years of the coronavirus pandemic, when rates hit more than a dozen record lows. Now that market has dried up.

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