Adjustable Rate Mortgage Demand Rises as Home Buyers Search for Cheaper Loans

A home is offered for sale in Chicago, on Jan. 20, 2022. (Scott Olson/Getty Images)

Demand for adjustable rate mortgages (ARM) is increasing as homebuyers look for lower interest rates on loans and the share of ARM applications among total mortgage inquiries rises to its highest level in more than two decades, according to the Mortgage Bankers Association (MBA).

Mortgage applications to buy a home rose by 5 percent for the week ending May 6 on a seasonally adjusted basis compared to a week earlier, according to a May 11 MBA press release. On an unadjusted basis, applications rose by 5 percent on a weekly basis and dropped 8 percent when compared to the same week in 2021.

The ARM share of mortgage activity rose to 10.8 percent of total applications. At the start of 2022, when mortgage rates were near record lows, the ARM share of total applications was just 3 percent, but now that mortgage rates are rising, ARM shares are surging as well, with the 10.8 percent margin being the highest since March 2008.

“Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates. Purchase activity has now increased for two straight weeks,” said Joel Kan, associate vice president of economic and industry forecasting for MBA.

“More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11 percent of overall loans and to 19 percent by dollar volume,” he said.

Some of the loan applications have been for 5/1 ARMs. These are loans with a fixed interest rate for the first five years, followed by a variable rate that’s adjusted each year thereafter.

For the week ending May 6, the average contract interest rate for 5/1 ARMs was 4.47 percent.

In comparison, a 30-year fixed-rate mortgage with a loan balance of $647,200 or less had an interest rate of 5.53 percent, while a 30-year fixed-rate mortgage with a loan balance greater than $647,200 had a rate of 5.08 percent.

The interest rate for 30-year fixed-rate mortgages backed by the Federal Housing Administration (FHA) was 5.37 percent. For a 15-year fixed-rate mortgage, the interest rate was 4.79 percent.

In a May 10 press release, the MBA revealed that mortgage credit availability fell for the second month in a row in April. Kan pointed out that lenders added more ARM programs to “help borrowers overcome higher rates and home prices.”

“ARMs are definitely becoming more and more popular,” said Trey Reed, a loan officer for Intercoastal Mortgage in Fairfax, Virginia, in an interview with NBC News. “In the last 90 days, we’re seeing probably a quarter to a third of all loans are ARMs. They’re an option that’s getting considered more than half the time.”

However, ARM mortgages also come with risks, and some experts worry that home buyers may not be able to accurately predict how much their payments will increase after the initial fixed-rate period is over.

“What you want to avoid is people chasing the lowest interest rate and the lowest payment and not thinking about the future,” Reed said.