Higher mortgage rates have caused renewed interest in alternative loan products such as adjustable-rate mortgages.
Compared to the same time last year, mortgage rates for 30-year fixed-rate loans have risen from 3.17 percent to 5.37 percent, according to CNBC.
This hike has caused the total mortgage application volume to fall 8.3 percent from the previous week, according to the Mortgage Bankers Association’s weekly survey.
Mortgage purchase applications also fell 8 percent, and were 17 percent lower than the same week a year ago.
In response, buyers are choosing adjustable-rate mortgages instead of fixed-rate, because they have lower initial interest rates that begin adjusting after a set period of time.
The average 5/1 ARM rate recently was at 4.28 percent. A 5/1 ARM means borrowers have a fixed interest rate for the first five years, then the rate will adjust annually for the next 25 years.
According to the MBA survey, the ARM share of applications was over 9 percent by loan count and 17 percent based on dollar volume.
This percentage is double what it was three months ago, according to MBA economist Joel Kan. He said this coincides with the 1.5 percentage point increase in the 30-year fixed rate.
Meanwhile, applications to refinance were 71 percent lower than the same week a year ago.
Last year’s record-low rates gave borrowers plenty of opportunities to refinance, experts say, with many understanding that if they missed that chance, the window of opportunity may be closed for now.
However, this doesn’t mean all refinance opportunities are lost, experts say.
It still could be a good time to get a cash-out refinance with current high home prices, or to refinance to an ARM and catch a lower rate for the next five to 10 years.
It all depends on a borrower’s unique goals and financial situation, experts say.
The mortgage industry must frequently adapt to the highs and lows of the economy, and ARMs are another way to allow borrowers more options to afford to purchase a home or refinance, experts say.
Lending experts caution that if borrowers do decide to get an adjustable-rate loan, they fully understand the fixed-rate period and what to expect after it ends.
Because ARM loans adjust after a fixed period of time, they are considered to be a bit riskier for borrowers than fixed-rate loans, experts say.
Some borrowers choose to get an ARM, then either sell their home or refinance to a fixed-rate loan before the initial fixed-rate period ends.