Adjustable-rate mortgages gain ground as high fixed rates lift payment risk
Homebuyers are increasingly weighing adjustable-rate mortgages as 30-year fixed borrowing costs remain above 7%, making lower initial monthly payments more attractive. The trade-off is that borrowers can face significantly higher costs later if rates do not fall enough to allow a refinancing into a fixed-rate loan.
Highlights
- Average five-year ARM rates reached 6.41% in late October versus 7.37% for 30-year fixed mortgages, per Mortgage Bankers Association data.
- ARM share of mortgage applications increased from 8% in early September to 11.3% in late October as borrowers seek lower initial payments.
- Borrowers on a $400,000 mortgage save about $256 per month with an ARM compared to a fixed loan during the initial fixed period.
Borrowing cost gap drives ARM appeal
As reported by CNBC, demand for adjustable-rate mortgages is rising as the rate gap with traditional fixed loans widens. The average rate on a five-year ARM that adjusts annually afterward stands at 6.41% in late October, compared with 7.37% for a 30-year fixed mortgage, according to Mortgage Bankers Association data.That spread is helping push ARMs from 8% of mortgage applications in early September to 11.3% in late October. On a $400,000 mortgage, the difference means a monthly principal-and-interest payment of about $2,505 on the ARM versus roughly $2,761 on the fixed loan, a savings of around $256 a month during the initial fixed period.
ARMs typically lock in a starting rate for five, seven or 10 years before resetting based on a benchmark interest rate. Some borrowers are betting rates will drop enough for them to refinance before those adjustments begin, allowing them to capture near-term savings and later move into a fixed loan.
Our earlier article on UBS’s outlook for a longer Federal Reserve tightening cycle explained how persistent inflation could keep policy restrictive for longer, with additional rate hikes expected beyond the near term. We noted that markets were increasingly pricing in higher-for-longer rates, pointing to an extended period of elevated borrowing costs and tighter financial conditions for consumers and businesses.
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