Homebuyers turn to ARMs as mortgage rates hover above 7% for third straight week
Mortgage rates haven’t shown signs of edging under 7% anytime soon, pushing buyers toward alternative financing options to strike deals.
The rate on the 30-year fixed mortgage increased to 7.22% from 7.17% the week prior, according to Freddie Mac. Rates have risen more than half a percent since the first week of the year and have hovered above 7% for three straight weeks.
It remains unclear when borrowing costs might start to ease, given the Federal Reserve’s decision this week to hold benchmark rates steady and keep them higher for longer. Though the Fed doesn’t directly impact mortgage rates — market reactions do.
For would-be homebuyers hoping to purchase this spring, climbing rates have been a significant obstacle. Still, many are pushing forward by scouting financing incentives like temporary buydowns or adjustable-rate loan options.
“People are interest-rate sensitive,” Sean Dycus, real estate agent at Mainstreet Properties, told Yahoo Finance. “We may not have 4% interest rates, but people know that at some point these rates will come down and they will refi.”
Demand for adjustable-rate mortgages spikes
Priced-squeezed homebuyers are doing anything they can to combat soaring borrowing costs, and that means adjustable-rate mortgages, or ARMs, are again gaining popularity.
The share of ARMs made up nearly 8% of total applications for the week ending April 26, the Mortgage Bankers Association (MBA) weekly survey found — the highest share seen this year.
The uptick in ARMs came even as overall applications for mortgages weakened last week after the average rate for the popular 30-year fixed home loan reached its highest level since November 2023.
Read more: What is an adjustable-rate mortgage? Is an ARM the way to go in 2024?
The upward pressure of rates caused both purchase and refinance applications to slide last week, putting both readings well below last year’s pace, the MBA noted. For instance, purchase applications fell 2% on a seasonally adjusted basis last week and were 14% lower than one year ago.
For one new-home sales adviser based in Summerville, S.C., the shift toward ARMs didn’t come as a surprise.
“People are looking for a payment [within their budget],” Eric Davis, a sales adviser at D.R. Horton, told Yahoo Finance. “A lot of people are very budget conscious now more than ever. For us, that means finding them a perfect blend of how we can fit a floorplan to get them the right payment. Is it going to take more seller concessions? More down? Financing options?”
The main reason adjustable-rate mortgages are becoming more popular? The average rate on these loans is a full percentage point lower than the rate on a typical 30-year fixed mortgage.
For instance, the average interest rate for a 30-year fixed loan backed by the FHA was 7.09% last week, according to the MBA’s calculations. For conventional loans, interest rates stood at 7.29%. Meanwhile, those seeking jumbo loans for homes priced above $766,550, a 30-year fixed rate averaged 7.39%.
By comparison, the average 5/1 adjustable-rate mortgage stood at 6.6% last week, according to the MBA.
At the same time, those buying at current rates are counting on refinancing their mortgage as soon as rates drop.
“We’re seeing a little more sophisticated buyer. They are not falling prey [to mortgage rate fears],” Dycus said. “They are being intelligent about it, all say they will refi when rates go down.”
Read more: Mortgage rates top 7% — is this a good time to buy a house?
Prospective buyers eye affordability
There is one shred of hope in the form of new listings.
There were 72,000 new listings for single-family homes for the week ending April 29, according to data from Altos Research, and another 21,000 were newly listed and already in contract. Taken together, that was more than any week last year. The last time there was this much seller activity in one week was July 2022.
Despite the increase in new listings, there are still 20% fewer sellers than a normal pre-pandemic year. That means that affordable listings popping up in the market are going fast.
“Very affordable listings that are put on the market for $300,000 are just flying off the shelf,” said Dycus, who is based in Charleston, S.C. “But once you go past that 350K mark, people are a lot more sensitive.”
According to Dycus, homes priced between $350,000 and the higher $750,000 are taking longer to sell while higher-end listings continue to have normal traction.
For some homes in that mid-level price range, there’s been an opportunity for price reductions.
Some 32.5% of homes on the market had price cuts for the week ending April 29, Altos Research found. According to their data, there were more homes on the market last month with price cuts than in any April in over a decade.
“People want a good deal,” said Dycus.
Gabriella Cruz-Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
