WASHINGTON–Housing affordability challenges have led to more homebuyers turning to adjustable-rate loans (ARMs), according to a new report.
As the Wall Street Journal noted and as CU lenders know, ARMs initially offer cheaper borrowing rates compared with a fixed-rate mortgage.
“But ARMs reset, usually after three to 10 years, which can saddle borrowers with higher monthly payments if mortgage rates have risen over that time,” the Journal stated. “That isn’t the only risk: Borrowers who want to refinance when rates drop might not qualify if they have had a job loss or another change in their financial situation.”
Buyers are Betting
Despite that, buyers are betting mortgage rates will decline in the coming year, the Journal noted, adding that the average rate for a 30-year fixed mortgage in the five days ended Oct. 29 was 6.15%, compared with 5.46% for five-year and seven-year ARMs, according to mortgage-technology company Optimal Blue.
As the CU Daily reported earlier, about 10% of purchase-mortgage applications were for ARMs in the week ended Oct. 3, the highest rate since 2023, according to the Mortgage Bankers Association. In early 2021, when mortgage rates were near historic lows, less than 3% of purchase applications were for ARMs, the report added.
‘Desperate’ Buyers
“Buyers are desperate for affordable monthly payments when home prices are up more than 50% since 2019 and are near all-time highs,” according to the Journal’s analysis. “Home-insurance and property-tax costs have also climbed in many parts of the country.”
Scott Bridges, who oversees consumer lending at Pennymac, told the Journal, “We see more borrowers trying to get rates in the 5% range” to make their monthly payments more affordable. “Typically, with an ARM loan, that’s one of the only ways you’re going to get there.”
While consumers feel comfortable rates will slowly drift lower, the Journal noted that ARM usage was much higher in 2004 and 2005, when roughly a third of all mortgage applications had adjustable rates.
Millions in Foreclosure
“Buyers welcomed ultralow initial rates, but then found they couldn’t afford the mortgage after the rate adjusted higher after only a couple of years,” the report reminded. “Millions of homeowners ended up in foreclosure after the housing market collapsed a few years later, partly because of ARM resets.”
