Rising mortgage rates have prompted homebuyers to explore alternative options such as adjustable-rate mortgages (ARMs) to reduce their monthly payments. ARMs have been gaining popularity, with their share of mortgage applications rising to 7.8% last week, the highest point of the year. These loans provide lower interest rates compared to fixed-rate counterparts, but they come with the risk of future adjustments to an unknown market rate.
The average contract interest rate for 30-year fixed-rate mortgages increased to 7.29% last week, while the average contract interest rate for 5/1 ARMs decreased to 6.60%. Mike Fratantoni, MBA’s SVP and chief economist, highlights that persistent inflation has led markets to anticipate prolonged higher rates, impacting the housing and mortgage markets.
Overall mortgage demand has declined, with applications for refinancing and home equity loans also experiencing a drop. Homeowners with low current rates are less inclined to refinance due to higher rates, while they are more likely to obtain home equity through second loans or lines of credit. Additionally, applications from potential homebuyers have decreased by 14% year-over-year, reflecting the impact of higher mortgage rates on home purchases. As the Federal Reserve meets this week, mortgage rates could see further fluctuations depending on the outcome of their interest rate commentary.
