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More home buyers are reaching for the ARMs. Adjustable-rate mortgages generally offer a lower introductory mortgage rate that is locked in for five, seven, or 10 years before then adjusting.
As mortgage rates rapidly rise, some buyers may be getting priced out, unless they lock in an ARM, which may have an introductory rate closer to the level of fixed-rate mortgages when they started their house hunt.
The average contract interest rate for a 30-year fixed-rate mortgage rose to 5.53% last week. The rate on a 5-year ARM, in comparison, was 4.47%, according to the Mortgage Bankers Association.
The demand for adjustable-rate mortgages has reached a 14-year high as buyers hunt for lower rates. At the beginning of the year when mortgage rates were still near record lows, the share of mortgages with adjustable rates was just 3% of all purchase applications. Now, the share of ARMs rose to 11% of overall mortgage loans, the MBA reports.
“More borrowers continue to utilize ARMs to combat higher rates,” says Joel Kan, an MBA economist.
Even as home prices and rates climb, mortgage demand has remained resilient. Mortgage applications to purchase a home increased 5% last week compared to the previous week. “Despite a slow start to this year’s spring homebuying season, prospective buyers are showing some resiliency to higher rates,” Kan says. “Purchase activity has now increased for two straight weeks.”