Homebuyers Can Still Get a Mid-6% Mortgage Rate—There’s Just One Big Catch

As housing costs have soared, more homebuyers are succumbing to the temptation of a riskier loan with a lower mortgage rate.

Applications for 5/1 adjustable-rate mortgages jumped 32.5% in the week ending Oct. 6 compared with four weeks ago, according to the Mortgage Bankers Association’s weekly survey. That’s likely a result of rates for these loans falling to the mid-6% range.

Borrowers seeking an ARM made up about 9.2% of all borrowers, the highest percentage since November 2022.

“While most mortgage rates increased last week, rates on ARMs declined, leading to an increase in ARM volume and an increase in overall applications,” MBA Deputy Chief Economist Joel Kan said in a statement. “The yield curve has become less inverted in recent weeks, and ARM pricing has certainly improved.”

However, ARMs are riskier than a traditional 30-year fixed-rate mortgage. That’s because after the introductory period on an ARM (five years for a 5/1, seven years for a 7/1, and 10 years for a 10/1), the mortgage rate on the loan adjusts every year to current rates.

Most borrowers using these loans expect rates will drop at the end of the initial loan period, and they can refinance their loans to the lower rates. Or they expect to sell their homes before their rate adjusts.

However, there are no guarantees that mortgage rates will fall. Many real estate experts predicted they would have fallen by now, but instead, they’ve ratcheted up. So while an ARM could be a financially savvy choice if rates go down, borrowers could also be locking themselves in to higher housing payments in the future.

Mortgage broker Rocke Andrews is seeing ARMs become more popular for jumbo loans—generally reserved for more expensive homes—and investors. However, he’s also seeing ARMs being offered on government-backed loans targeting cash-strapped, first-time homebuyers.

“When the pricing is good, they are a great option,” says Andrews, of Lending Arizona in Tucson.

Recently, rates on ARMs have dropped, which has made them more attractive.

“If the upfront cost is not too high, then I expect more borrowers to start considering adjustable-rate mortgages,” adds Andrews.

With mortgage rates approaching 8%, a 5/1 ARM might be particularly enticing. Buyers could get their rates down to the mid-6% range, according to the MBA’s data.

Effective rates for a 5/1 ARM averaged about 6.66% for borrowers who didn’t buy down their rates in the week ending Oct. 6, according to the MBA. That was compared with effective rates averaging 7.89% for traditional 30-year fixed-rate mortgages.

That said, rising mortgage rates—coupled with high home prices and a nationwide housing shortage—have led to fewer buyers seeking any kind of mortgage.

“Application activity remains depressed and close to multidecade lows,” Kan said in a statement.

ARM applications were still down 34.2% from the previous year, according to the MBA.

“The risk to the buyers is that eventually the rates will go up and they may not be able to afford the home,” says Andrews. “But prices are going up so quickly that, if they wait, they may not be able to afford the home. This [5/1 ARM] is a way to get into the home now and refinance later.”

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