Americans are increasingly opting for riskier home loans which offer lower rates, the latest data shows, as they try to navigate a stubbornly hostile and unaffordable housing market. The share of borrowers picking up adjustable-rate mortgages, also known as ARMs, was 8 percent last week, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey (WMAS) for the week ending August 28, the highest level in five weeks, as MBA senior vice president and chief economist Mike Fratantoni said in a statement. This type of home loan comes with an interest rate that stays fixed for a set period, up to ten years, and then changes periodically based on market benchmarks or a lender-set percentage.
While more convenient initially, these loans are considered riskier than fixed-rate mortgages depending on future rates. For Joel Berner, senior economist at Realtor.com, Americans’ growing demand for riskier loans "is a sign of eagerness to buy amid binding affordability constraints." As mortgage rates have risen from just below 6 percent to 6.71 percent since the start of the war in Iran in late February, exacerbating buyers’ affordability issues, "a slightly lower rate can make a major difference between making and not making a monthly payment for buyers on the margin," Berner told Newsweek. As of the week ending on September 3, the national 30-year fixed-rate mortgage averaged 6.71 percent, according to Freddie Mac, up 0.05 percentage points from a week earlier and 0.21 from a year earlier.
The 15-year fixed-rate mortgage, in the same week, averaged 6.04 percent, up 0.44 percentage points from a year earlier. Home prices, meanwhile, have also continued rising this year. According to Redfin, the national median sale price of a typical U.S. home was $407,730 in July, the latest data available, up 3.2 percent from a year earlier.
This increase in interest for ARMs comes amid tepid demand for conventional mortgages. MBA found that total mortgage application volume rose just 0.8 percent last week compared with the previous week. "ARMs make a lot of sense for buyers that don’t expect to be in their home for a long time," Berner said.
Because an ARM offers a lower initial interest rate than a traditional 30-year fixed mortgage, the borrower can benefit from lower monthly payments during the period when the rate is fixed. The risk comes later, when the rate resets and can move higher. But for someone who expects to sell the home, relocate, or refinance before the adjustment period ends, that risk may never materialize.
In that situation, they get the benefit of the lower introductory rate without necessarily facing the future rate reset. For Berner, "the risk that mortgage rates will move against the ARMed buyers is real, but it doesn’t mean that the buyers today are of lower creditworthiness," he said, highlighting a huge difference with what happened during the subprime mortgage crisis. The growth in demand for risky loans is "not a sign of current distress, more indicative of buyers trying to stretch a dollar in this environment of higher rates and inflation," Berner said.
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