In the face of surging mortgage rates and high house prices, homebuyers are increasingly turning to adjustable-rate mortgage (ARM) deals. Despite the negative reputation from the early 2000s housing crisis, these deals made up 9.2% of last week’s loan applications, marking the highest level since November 2022, according to data from the Mortgage Bankers Association (MBA).
The surge in ARM applications comes as fixed-rate 30-year loans reach a two-decade high of 7.57%, as per Freddie Mac data, prompting homebuyers to lower their short-term payments. However, the rate on a 5/1 ARM loan has decreased to 6.33%, making it an attractive option for buyers.
ARMs offer a fixed rate for a specified period—often five, seven, or ten years—before adjusting according to market rates. The reset rate is determined by the Secured Overnight Financing Rate. A buyer purchasing a median-priced home ($407,100) with an ARM would pay $2,528 monthly for the first seven years, saving $335 per month compared to a fixed-rate mortgage.
Bob Broeksmit, CEO of MBA, noted a 15% increase in ARM applications amid this backdrop. He attributes the shift towards ARMs to high mortgage rates that are pushing homebuyers to seek ways to lower their initial payments.
However, experts caution against ARMs due to potential price increases and the need for excess payments to counteract possible interest rate hikes. They advocate for fixed rates for budget predictability and foresee high mortgage rates persisting.
The Federal Reserve’s aggressive interest rate hikes have been a significant factor influencing these trends. These hikes are influenced by the yield on 10-year US Treasuries and predictions about future actions. In response to this, several associations, including the National Association of Realtors and National Association of Home Builders, recently sent a letter urging the Fed to halt rate hikes.
The Fed officials will convene on October 31 to discuss potential rate hikes. Meanwhile, other ARM types like the 5/6 ARM offer different reset periods, providing more options for homebuyers.
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