Demand for riskier home loans is high as interest rates soar

Demand for mortgages fell again last week as rates climbed, but one type of loan is attracting borrowers. Adjustable-rate mortgages, or ARMs, which offer lower rates, are seeing renewed demand after seeing very little interest over the past decade.

Total mortgage application volume fell 2% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index, as rates soared.

The average contractual interest rate for 30-year fixed rate mortgages with conforming loan balances ($647,200 or less) increased from 6.75% to 6.81%, with points rising from 0, 95 to 0.97 (including origination fees) for loans with a 20% downgrade. Payment. This is the highest rate since 2006.

“The news that job growth and wage growth continued in September is positive for the housing market, as higher incomes support housing demand. However, it has also pushed back the possibility of a short-term pivot from the Federal Reserve on its plans for additional rate hikes,” MBA chief economist Michael Fratantoni wrote in a statement.

The average ARM 5/1 rate, which has a fixed rate for the first five years, rose slightly, but was still lower, at 5.56%. The share of ARM apps was just under 12%. When rates were lower earlier this year, that share was just 3%, where it had been for several years.

ARMs can be fixed for up to 10 years, but they are considered riskier loans because the rate eventually adjusts to the market rate. Rates have been so low for so long that before rates started to rise, borrowers didn’t need to take on that extra risk.

Higher headline rates crushed refinance demand even more, with requests down 2% for the week and 86% from the previous week. At this rate level, there are barely 150,000 borrowers who can qualify for a refinance because so many already have loans at much lower rates, according to Black Knight, a mortgage technology and analytics firm.

Mortgage applications for buying a home, which fell 2% on the week, were 39% lower than a year ago. Buyers pulled back this fall as higher rates made affordability even worse. Home prices are starting to fall, but potential buyers are also concerned that if they buy now, their new home will lose value over the coming year. Worries about a recession also make buyers reluctant to make such a large investment.

Mortgage rates have risen even more to start this week; another Mortgage News Daily survey pegged the 30-year rate now well above 7%. All eyes are now on the latest inflation report due out on Thursday. This could move rates decisively in either direction.

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