Mortgage rates are on the rise, this year, cutting down refinance demands while simultaneously forcing many potential home buyers to apply for higher-risk loan products in order to keep lower rates.
Overall, total mortgage application volume slipped by more than 8 percent last week, compared against the week before. According to the seasonally-adjusted Mortgage Banker’s Association’s index, demand for mortgages is now half what it was just one year ago.
As might be expected, rising interest rates are the culprit. Today, the average contracts interest rate on a 30-year fixed-mortgage (with conforming loan balances no greater than $647,200) increased from 5.2 percent to 5.37 percent. Along with this, points have risen from 0.66 to 0.67 (including origination fees) for all loans that carry a 20 percent down payment. This is the highest such interest rate since 2009. For perspective, the same rate was only 3.17 percent for the very same week, year-over-year.
And, of course, these higher rates are putting a lot of pressure on potential home buyers. While there is still a strong demand for housing, mortgage applications for home sales sank 8 percent last week. Furthermore, this is 17 percent down from the same week last year; and, most importantly, this is typically the core of Springtime housing season.
Instead of these traditional mortgages, then, buyers are now opting for adjustable-rate mortgages because these can typically offer far more attractive interest rates. Accordingly, the average rate on a 5-year adjustable-rate mortgage, for last week, was 4.28 percent.
Adjusted-rate mortgages can be fixed for any number of terms: typically five, seven, or ten years (etc). What makes them “adjustable” is what happens at the end of their fixed term. Once the term expires, the mortgage rate defaults to current market rate. This means they are a little more risky than a 30-year fixed mortgage. For example, while a standard lifetime ARM cap of 5 percent could bring you an extremely affordable 4.38 percent in the first few year, it will still likely close at 10 percent many years later.
