Demand for riskier adjustable-rate mortgages hits highest level of the year, due to rising rates

An aerial view shows a subdivision that has replaced the once rural landscape in Hawthorn Woods, Illinois.

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When mortgage rates rise, consumers look for any way to lower their monthly payments, and that often leads them to adjustable-rate mortgages. These loans offer lower interest rates than their fixed-rate counterparts but are considered riskier. While they can be fixed for up to 10 years, they eventually adjust to an unknown future market rate.

The share of ARM applications rose to 7.8% of mortgage demand last week, according to the Mortgage Bankers Association. That is the highest level of the year. When mortgage rates hit record lows in 2021, the ARM share of applications was in the 3% range.

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 previous week, with points decreasing to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. Meanwhile, the average contract interest rate for 5/1 ARMs fell to 6.60% from 6.64%.

“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer. No doubt, this is a headwind for the housing and mortgage markets, with the 30-year fixed mortgage rate increasing to 7.29 percent last week, the highest level since November 2023,” said Mike Fratantoni, senior vice president and chief economist at the MBA.

Overall mortgage demand dropped 2.3% last week compared with the previous week, according to the MBA’s seasonally adjusted index.

Applications to refinance a home loan fell 3% for the week and were 1% lower than the same week one year ago. With rates 79 basis points higher than a year ago, homeowners have little incentive to refinance. Those wanting to take out home equity are more likely to do that through a second loan or line of credit, rather than give up their current low rate.

Applications from potential homebuyers fell 2% for the week and were 14% lower than the same week one year ago.

Mortgage rates rose further to start this week and will likely make a more significant move, higher or lower, depending on interest rate commentary from the Federal Reserve, which ends its meeting Wednesday.