Adjustable-Rate Mortgage Applications Reach Highest Level in 15 Years, But Where Are They Heading?

Adjustable-Rate Mortgage Applications Reach Highest Level in 15 Years, But Where Are They Heading?

The borrower must decide if the lower introductory rate is worth the risk of higher payments later.

The recent announcement from the Federal Reserve that interest rates will be raised 75 basis points (and the idea that another hike is coming at their next meeting) has added to borrowers’ interest in adjustable-rate mortgages (ARMs). So much so, in fact, that the share of ARM applications is the highest it has been in 15 years, because many homebuyers are so desperate buy a home that they need to find a mortgage they can afford in rising-cost mortgage and generally stable home pricing environments, according to recent Zillow analysis.

Are ARMs going to continue to make a strong showing in today and tomorrow’s economic climate as borrowers seek out the most affordable mortgage solution? We culled the news for expert analysis and commentary. Here’s what we found:

ARMs started the year strong, according to CoreLogic Principal Economist Yanling Mayer.

“In the first 5 months of 2022, total ARM-financed home purchases have increased by a staggering 75% from the same period a year ago. As of May 2022, of the approximately 454,000 mortgaged home purchases, nearly 28,000 or 8.5%, were financed with an ARM, compared to only 13,400 or 3.5% of mortgaged home purchases at this time in May (2021).”

But this trend slowed as the year progressed. Borrowers have begun to move away from these loans a bit, which are no longer offering the bargains they did just a few months ago, according to MBA Economist Joel Kan.

“The spread between conforming fixed-rate loans and ARM loans narrowed to 84 basis points from over 100 basis points the prior week. This movement made fixed rate loans relatively more attractive than ARMs, thereby reducing the ARM share further from highs seen earlier this year.”

Still, with rates expected to bump up again, ARMs present an option to home shoppers who want to buy now.

Nicole Bachaud, senior economist at Zillow Group Inc., told the Wall Street Journal that ARM volume might hold strong because the loans give borrowers the option to refinance later.

“We’ve hit this affordability ceiling. People can’t afford to buy anymore, but they still want to. They think, ‘If something comes available, I’m going to do anything I can to get into a home.’ And the ARM might be a tool in the toolbox that helps them cross that threshold.”

The amount of time you plan to live in the home matters.

Mortgage Reports Editor Peter Warden noted that there are situations in which an ARM will always make sense, regardless of rates.

“If you’re buying your ‘forever home,’ there’s still real value in a fixed-rate mortgage loan. You’ll have a guaranteed rate and payment for the long haul, offering more security in your budget. And if rates fall later on, there’s always the option to refinance. On the other hand, if you’re sure you’ll move within five to 10 years — that is, within an ARM’s fixed-rate period — you should seriously explore adjustable-rate mortgages. After all, why pay more to lock a rate for 30 years when you can pay less to lock it for the number of years you’ll live in the home? For many, that’s a no-brainer.”

With interest rates still in flux, it remains to be seen how tight the mortgage market may get. How this will impact the general appetite for ARM loans remains to be seen, and we’ll be here to report on any significant developments.