Home buyers have had to accept that mortgage rates probably won’t drop back down to record lows anytime soon.
The average 30-year fixed rate was 5.3% as of Thursday, according to the government-backed mortgage buyer Freddie Mac. That’s up from 2.8% a year ago.
Because of higher mortgage rates and still-rising home prices, fewer aspiring buyers can afford to purchase homes. “We are seeing people become a little desperate,” said Jacob Channel, senior economist at the online lending marketplace LendingTree.
Enter the adjustable-rate mortgage. During the first half of 2022, as interest rates climbed, the share of adjustable-rate mortgages nationwide rose from 3% to 10% of loans, according to the Mortgage Bankers Association.
These loans start at “teaser” interest rates that are typically lower than fixed-rate loans. After a certain number of years, the rate periodically adjusts based on economic conditions.
“People ask about them always when interest rates are rising,” said Phil Giordano, director of Republic Bank’s residential mortgage division, “yet very few in the long run elect to take them.”
He said that in the last 90 days, he has seen the number of adjustable-rate loans in the bank’s pipeline increase about 5%. Republic lends in the tristate area and New York.
Mortgage rates still are at historic lows compared to the double-digit rates of the 1980s, and fixed-rate mortgages remain the most popular choice among home buyers. The 30-year fixed rate is down from about 5.8% in June.
Why do buyers choose an adjustable-rate mortgage?
The average interest rate for a mortgage in which the rate stays the same for five years and then adjusts annually — a common agreement called a 5/1 ARM — was 4.29% on Thursday, according to Freddie Mac. That’s up from a year ago but about a percentage point lower than the 30-year fixed rate.