High rates push borrowers towards adjustable-rate mortgages
The adjustable-rate mortgage (ARM) share of activity continued to grow despite the downturn in overall applications, according to the latest data from the Mortgage Bankers Association (MBA).
Overall mortgage applications decreased 2.3% for the week ending April 26 as the average rate on a 30-year fixed mortgage rose to 7.29%, the highest since November 2023.
“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer,” said Mike Fratantoni, senior vice president and chief economist at MBA. “No doubt, this is a headwind for the housing and mortgage markets, with the 30-year fixed mortgage rate increasing to 7.29% last week.”
As affordability erodes, an increasing number of prospective homebuyers are turning to lower their payments.
Adjustable-rate mortgages now account for 7.8% of total applications – the highest share seen this year. Meanwhile, the refinance share of mortgage activity dropped six basis points to 30.2% of total applications from the previous week.
Read more: Market shifts in favor of ARM borrowers – Zillow
“One notable trend is that the ARM share has reached its highest level for the year at 7.8%,” Fratantoni said. “Prospective homebuyers are looking for ways to improve affordability, and switching to an ARM is one means of doing that, with ARM rates in the mid-6% range for loans with an initial fixed period of 5 years.”
While providing temporary payment relief, ARMs also expose borrowers to potentially higher rates down the road when the initial fixed period ends. Lenders have responded by raising the qualifying requirements for ARMs.
Fratantoni noted that application volumes for both purchases and refinances "remain well below last year's pace" as elevated rates continue weighing on housing activity.
The refinance Index fell 3% week over week and was down 1% compared to the same week last year. Similarly, the seasonally adjusted purchase Index saw a 2% decrease from the week before, and on an unadjusted basis, it fell 1% week over week and 14% year over year.
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