WASHINGTON–With the average rate on the 30-year fixed mortgage now topping 6%, it’s no surprise an increasing number of borrowers are turning to adjustable-rate mortgages (ARMs) as they seek lower payments and gamble on refinancing later.
According to Freddie Mac, the average rate on a 5/1 ARM was 4.93% this week, more than a full percentage point lower than the 6.02% average rate for a 30-year-fixed loan.
Those rates are a stark contrast to where things stood just a year ago, when at this time mortgage rates were available as low as 2.86%. As Freddie Mac noted, a monthly payment on a $300,000 30-year-fixed loan is roughly $1,250 at 3% and about $1,800 at 6%, a 44% increase.
The rising rates have helped to cool the red hot home market, but as of July the median home price was around $403,800, according to the National Association of Realtors.
‘Affordability Ceiling’
“We’ve hit this affordability ceiling,” Nicole Bachaud, senior economist at Zillow Group told the Wall Street Journal. “People can’t afford to buy anymore, but they still want to. They think, ‘If something comes available, I’m going to do anything I can to get into a home.’ And the ARM might be a tool in the toolbox that helps them cross that threshold.”
According to the Mortgage Bankers Association, as of August 2022, more than 9% of all mortgage applications were for ARMs, up from 3.3% this same time in 2021.
Although the Fed at its meeting this week indicated it will continue to push rates higher, Fannie Mae said it expects the average rate on a 30-year-fixed mortgage will fall to 4.5% by the second quarter of 2023, and that ARMs will fall even further, to 3.9%.
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