Demand for riskier mortgages rises along with interest rates

• The ARM share of applications increased as borrowers seek lower initial rates (5.94%) versus fixed rates (6.79%), despite the risk of future rate adjustments
• Purchase applications rose 2% week-over-week but remained 0.2% below year-ago levels, while refinance applications fell 1% and were down 19% year-over-year
• Ample housing inventory in local markets is supporting transaction volume despite elevated rates, providing buyers with more choices

Summary: Demand for Riskier Mortgages Rises Amid Higher Interest Rates

Mortgage rates continue climbing, pushing borrowers toward riskier loan products while overall application volume remains stagnant. Total mortgage application volume increased just 0.8% week-over-week, according to the Mortgage Bankers Association.

Key Rate Movements:

• 30-year fixed-rate mortgages (conforming loans ≤$832,750) rose to 6.79% from 6.78%
• 5/1 adjustable-rate mortgages (ARMs) fell to 5.94%
• Rates reached their highest level in four weeks, with inflation concerns and growing deficits driving yields higher globally

Application Trends:

• Purchase applications increased 2% week-over-week but remained 0.2% below year-ago levels
• Refinance applications fell 1% for the week and were down 19% year-over-year
• ARM share of activity has doubled, indicating borrowers are seeking lower initial rates despite future adjustment risk

Market Implications:

The shift toward ARMs signals borrower strain as elevated rates persist. While these products offer lower initial rates (5.94% vs. 6.79%), they carry significant risk since rates can adjust after 5-10 years based on future market conditions. MBA Chief Economist Mike Fratantoni noted that ample local housing inventory is supporting transaction volume despite rate headwinds.

Refinancing activity remains suppressed as most existing borrowers locked in lower rates previously, with little incentive to refinance unless extracting home equity. Current rates are 15 basis points higher than a year ago and reached the highest level since June 2025 this week, according to Mortgage News Daily.

The data suggests a challenging housing finance environment where buyers face affordability pressures while taking on increased future rate risk.