As mortgage rates climb, consumers are on the lookout for ways to reduce their monthly payments, often turning to adjustable-rate mortgages (ARMs). These loans offer initial lower interest rates compared to fixed-rate mortgages but come with the risk of future rate adjustments. While ARMs can offer fixed terms for up to a decade, they eventually shift to reflect prevailing market rates.
Last week, the share of ARM applications surged to 7.8% of total mortgage demand, marking the highest level seen this year. In 2021, when mortgage rates hit historic lows, ARM applications hovered around the 3% mark.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances rose to 7.29% last week from 7.24% the week before. On the other hand, the average contract interest rate for 5/1 ARMs decreased to 6.60% from 6.64%.
Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association (MBA), noted, “Inflation remains persistently high, suggesting that rates, including mortgage rates, will likely remain elevated for an extended period.” The 30-year fixed mortgage rate reached 7.29% last week, the highest level since November 2023.
Overall mortgage demand dipped by 2.3% last week compared to the previous week, according to the MBA’s seasonally adjusted index.
Refinance applications decreased by 3% for the week and were 1% lower than the same period last year. With rates nearly 79 basis points higher than a year ago, homeowners have limited motivation to refinance. Those seeking home equity may opt for second loans or lines of credit instead of relinquishing their current low rates.
Applications from prospective homebuyers also declined by 2% for the week and were down by 14% compared to the same period last year.
Mortgage rates continued to climb at the beginning of this week, with potential for further movement based on interest rate commentary from the Federal Reserve, which concludes its meeting on Wednesday.
