Mortgage rates are on the rise again. As of April 14th, the average rate for a 30-year fixed mortgage is 5.2% - a marked increase of more than 1.5% from the beginning of the year - and is expected to continue to rise. As a result, traditional mortgage applications have seen a steady decline. This week, mortgage applications dropped 1.3% from just the week before. Refinancing requests have also dropped - to the lowest level since 2019.
The Mortgage Bankers Association recently published their annual yearly forecast. They foresee mortgage originations through 2022 reaching $2.58 trillion. This may seem like a high number, but it is a staggering 35.5% decline from 2021. In an interesting development, purchase originations are on track to set a new record with a forecasted $1.72 trillion - up 4% from 2021.
The MBA report shows that buyers are looking for ways to get around the steep mortgage rate. One of the primary ways that they are doing that is by applying for ARM mortgages instead of the standard 30-year fixed mortgage. An ARM loan is an adjustable rate mortgage, meaning that the interest rate can and will vary over the life of the loan. Typically, the rate is set in the beginning for a set period of time. Once that is up, the rate gets reset by the lender - sometimes every year, but it can be even more frequent than that, like once a month - according to the benchmark or index, with the addition of an ARM margin.
The MBA reports that ARM’s are currently representing 7.1% of the market share of mortgage applications, making it the highest percentage since 2019, and growing. Why are more people choosing an adjustable rate mortgage these days? The interest rate set for an adjustable rate mortgage is typically lower than a fixed mortgage. Lenders must set the rate of a fixed mortgage higher because they have to account for and predict future increases. An adjustable rate mortgage, however, does not have to take this into account. Therefore, the interest rate on an ARM is lower and can give buyers lower payments and make them able to afford a higher purchase price. What’s the catch? This typically only lasts for the first few years on the life of the loan. The nature of an adjustable rate mortgage is that it is adjustable. Following the pre-defined initial phase of lower rates, the lender will re-calculate the interest rate on the loan and payments will surely go up. It is a gamble because one cannot know for sure how high rates can go over the course of the loan and buyers must be sure that they will be able to afford the higher future payments. Often, adjustable rate mortgages are the choice of buyers who do not plan on keeping a property for many years, thus avoiding the eventual higher costs. Today, the uptick in ARM applications could signal a shift in the market. The Mortgage Bankers Association has reported seeing an increase in ARM applications for both government and conventional loans. This is highlighting the large demand of buyers, still, and the potential workarounds to the issues of affordability in today’s real estate market that are being sought by buyers.
Understanding the mortgage process, especially in a market like the one we are seeing in 2022 can be difficult. Contact our experienced Florida Keys realtors at Broker’s Edge to help you make the process easy to understand so that your Florida Keys real estate transaction can be smooth sailing!