Homebuyers Are Taking on Riskier Mortgages

The share of adjustable-rate mortgage (ARM) applications increased for the week ending April 19, according to data from the Mortgage Bankers Association (MBA), as they jumped 7.6 percent of total home loan applications.

ARM home loans can be relatively risker than the 30-year fixed rate mortgage, analysts say, as their interest rate can change after the initial time period of the loan compared to the longer-term alternative.

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They tend to charge less interest but can fluctuate depending on where overall market rates stand after a period of time, according to Rocket Mortgage. The move by buyers toward those loans for the week ending April 19 was an attempt to seek cheaper borrowing costs for their home loans, MBA pointed out.

The Context

Mortgage applications fell 2.7 percent for the week ending April 19 as mortgage rates rose for the third consecutive week, depressing activity in the market.

"Mortgage rates continued to move higher last week, reaching their highest levels since late 2023 and putting a damper on applications activity," Joel Kan, MBA's deputy chief economist, said in a statement.

The 30-year fixed rate jumped to 7.24 percent, the highest since November 2023, Kan pointed out.

"Purchase applications declined, as homebuyers delayed their purchase decisions due to strained affordability and low supply," Kan said. "The ARM share of applications increased to 7.6 percent, consistent with the upward trend in rates, as buyers look to reduce their potential monthly payments."

High mortgage rates have made buyers concerned that they can't afford to purchase property. A recent survey from real estate platform Redfin found that close to 40 percent of homeowners may not be able to afford to acquire their house if they were purchasing it now.

Views

Some analysts say that ARM mortgages can be riskier than the fixed term ones.

"They are certainly riskier for buyers than a fixed-rate mortgage because the rate that you're charged on the money you borrow for a mortgage can change," Danielle Hale, chief economist at Realtor.com, told Newsweek.

ARM home loans are fixed for a period, typically five to seven years, where that initial rate can change, Hale pointed out, adding that they are less risky than they were 20 years ago as there are now protections in contracts over the adjustments that can happen.

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"It doesn't change every month. It probably changes once a year, maybe twice a year, and there are usually limits around how much any one change can be," she told Newsweek. "So maybe it can't go up or down by more than a percentage point each year, and there are also generally limits on the cumulative increase you can experience over the course of the loan."

She added: "They are riskier. But there are also some protections in those loans."

Looking at the 7.6 percent increase in share of activity for the week ending April 19, this was lower than the double-digit jump seen in the fall of November, Hale said, when rates were near the 8 percent territory.

What's next

The housing market will respond to how borrowing costs unfold over the next few weeks. Hale said that if inflation stays elevated above the Federal Reserve target, it could mean that the central bank keeps borrowing costs high.

"Housing is a very interest rate sensitive sector and what happens with mortgage rates is going to be really important for the housing market in 2024," she said.