Borrowers head back to riskier mortgages, looking for any potential savings

Mortgage demand overall weakened again last week, even as interest rates fell slightly. For those still in the market, though, they are looking increasingly to adjustable-rate loans to get the lowest interest rate possible.

Total mortgage application volume dropped 4.7% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances, $806,500 or less, decreased to 6.43% from 6.46%, with points falling to 0.60 from 0.61, including the origination fee, for loans with a 20% down payment. The rate was just 7 basis points lower the same week one year ago.

Applications to refinance a home loan, which rose sharply in mid-September and then dropped back again two weeks ago, fell further last week, down 8%. Refinance demand is still 18% higher than it was the same week one year ago.

“With mortgage rates on fixed-rate loans little changed last week, refinance application activity generally declined, with the exception of a modest increase for FHA refinance applications,” said Mike Fratantoni, senior vice president and chief economist at the MBA.

Applications for a mortgage to purchase a home fell 1% for the week and were 14% higher year over year. Purchase demand hasn’t moved much in the past few months as potential homebuyers contend with high prices and growing uncertainty in the economy. While the supply of homes for sale is higher than it was a year ago, more sellers are delisting their properties, or choosing to wait before listing.

For those who are buying or refinancing, somewhat riskier adjustable-rate mortgages are gaining in popularity, as they offer lower interest rates. Rate terms on ARMs can be fixed for up to 10 years, but the loans are considered riskier, as they can adjust higher depending on market conditions when the fixed term expires.

“The ARM share increased to 9.5 percent last week from 8.4 percent the prior week. Our survey shows 5/1 ARM rates are averaging almost a percentage point below 30-year fixed rates, and this differential is leading more purchase and refinance applicants to consider ARMs,” said Fratantoni.

Mortgage rates haven’t done much to start this week, as the absence of government data on the economy, due to the shutdown, has kept bond markets relatively calm.