Demand for riskier mortgages rises again, along with interest rates

• The average 5-year ARM rate dropped to 5.82% from 5.94%, offering over one percentage point savings compared to the 30-year fixed rate of 6.85%
• Refinance applications fell 6% for the week and are down 25% year-over-year, reaching the slowest pace since May 2025
• Purchase applications remained essentially flat despite increased housing inventory in many markets, as higher rates continue to weigh on prospective homebuyers

Summary

Key Development: Demand for adjustable-rate mortgages (ARMs) reached 8.5% of total mortgage applications last week, the highest level since June, as borrowers seek relief from rising fixed mortgage rates.

Critical Data Points:

• 30-year fixed-rate mortgage rates increased to 6.85% from 6.79%, the highest since June 2025 and 36 basis points higher year-over-year
• 5-year ARM rates fell to 5.82% from 5.94%, creating a 103 basis point advantage over fixed rates
• Total mortgage application volume declined 2.7% week-over-week
• Refinance applications dropped 6% weekly and 25% year-over-year, reaching the slowest pace since May 2025
• Purchase applications remained flat, down 0.2% weekly but up 4% year-over-year
• ARM demand has nearly tripled from pandemic-era lows of 3%

Market Drivers: Rising mortgage rates are attributed to investor concerns over inflation and federal budget deficits. The conforming loan limit stands at $832,750.

Sector Implications: The mortgage and housing markets face continued pressure as higher rates discourage refinancing activity and weigh on prospective homebuyers, despite increased housing inventory in many markets. The shift toward ARMs indicates borrowers are accepting more risk to access lower initial rates, with some ARMs offering fixed periods up to 10 years.

Outlook: Mortgage rates remained stable early this week as investors await monthly inflation data releasing later in the week, which could significantly move rates in either direction.