Shown is a newly sold home in Houston, Texas.
Brandon Bell | fake images
They could be more listings on the market, or maybe just fearing interest rates will go even higher, but homebuyers are showing increased demand for mortgages. However, they are turning even more to adjustable-rate mortgages (ARMs), which offer lower rates. That gives them an advantage as both rates and home prices continue to rise.
Mortgage applications to buy a home rose 5% last week compared to the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was still 8% lower than the same week a year ago, but that annual drop is now narrowing.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.53% from 5.36%, with points rising to 0.73 from 0.63 (including origination fee) for loans with a 20% down payment. The 5-year MRA rate was 4.47%.
“Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resistance to higher rates. Buying activity has now picked up for two weeks in a row,” said Joel Kan, MBA economist, in a statement. “More borrowers continue to use ARMs to combat higher rates. The share of ARMs has increased to 11% of total loans and 19% by dollar volume.”
Earlier this year, when rates were still hovering around record lows, ARM’s share was just 3% of all purchase requests. At 11%, that’s the highest proportion since March 2008.
ARMs offer lower rates that can be locked in for terms such as five, seven or 10 years. ARMs are fully underwritten like fixed-rate mortgages and require a down payment. This was not the case in the early 2000s, when poorly underwritten interest-only ARMs with short trial periods were blamed for the epic housing crash.
While homebuyers are showing more interest, current homeowners are less interested in refinancing. Those apps dropped another 2% week over week and were 72% lower than a year ago. There is simply a very small group of borrowers who can benefit from a refinance at current interest rates. Refinancing fueled record profits for lenders in the early years of the coronavirus pandemic, when rates set more than a dozen record lows. Now that market has dried up.