The Rise of Adjustable-Rate Mortgages: A Risky Move for Consumers

With the recent rise in mortgage rates, consumers are searching for ways to lower their monthly payments. This has led to a surge in applications for adjustable-rate mortgages (ARMs), which offer lower interest rates compared to fixed-rate mortgages. However, ARMs are considered riskier as they come with the uncertainty of future market rates. Last week, the share of ARM applications reached 7.8% of the total mortgage demand, marking the highest level of the year.

While ARMs may seem like an attractive option initially due to their lower interest rates, there is a significant risk involved. These loans can be fixed for a certain period, typically up to 10 years, before they adjust to the prevailing market rate. With inflation on the rise, there is a growing concern that rates, including mortgage rates, will remain higher for an extended period. This poses a significant challenge for both the housing and mortgage markets.

The average contract interest rate for 30-year fixed-rate mortgages has increased to 7.29%, the highest level since November 2023. This significant rise in rates has resulted in a 2.3% drop in overall mortgage demand compared to the previous week. Applications to refinance a home loan have also declined by 3%, as homeowners are deterred by rates that are 79 basis points higher than the previous year.

Applications from potential homebuyers have also decreased by 2% for the week and are 14% lower than the same period last year. The current mortgage rates have made it less attractive for buyers to enter the market, further dampening demand. Homeowners looking to tap into their home equity are more likely to opt for a second loan or line of credit, as they are reluctant to give up their existing low rates.

With mortgage rates continuing to rise, there is uncertainty about the future direction of the market. Rates are expected to fluctuate based on interest rate commentary from the Federal Reserve, which is closely monitored by investors. The decision of the Federal Reserve after its meeting this week will likely have a significant impact on the direction of mortgage rates in the near future.