Demand for riskier residence loans is excessive as rates of interest rise

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

According to the Mortgage Bankers Association’s seasonally adjusted index, total mortgage applications fell 2% last week from the previous week, reflecting rising interest rates.

The average contract rate for 30-year fixed-rate mortgages with matching loan balances ($647,200 or less) increased from 6.75% to 6.81%, with points going from 0.95 (including the setup fee) to 0.97 for loans with a Discount of 20% increased payment. This is the highest value 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 sidelined the possibility of a near-term turnaround by the Federal Reserve on its plans for additional interest rate hikes,” wrote Michael Fratantoni, MBA’s chief economist, in a press release.

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

ARMs can be locked in for up to 10 years, but are considered riskier loans because the interest rate eventually adjusts to the market interest rate. Interest rates were so low for so long that borrowers didn’t have to take that extra risk before interest rates started to rise.

Higher overall interest rates pushed refinancing demand even further, with requests down 2% this week and 86% year-on-year. At this level of interest rates, there are barely 150,000 borrowers who can benefit from refinancing because so many people already have borrowing at far lower rates, according to Black Knight, a mortgage technology and analytics company.

Mortgage applications to buy a home, which fell 2% this week, were 39% lower than a year ago. Buyers have fared back this fall as higher interest rates have made affordability even worse. Property prices are beginning to ease, but potential buyers are also concerned that if they buy their new home now, they could lose value in the coming year. Concerns about a recession are also discouraging buyers from making such a big investment.

Mortgage rates continued to rise earlier this week; Another survey by Mortgage News Daily has put 30-year fixed rates now well above 7%. All eyes are now on the latest inflation report, due out on Thursday. It could move rates decidedly either way.