Borrowers Shift Toward Riskier Mortgages Seeking Lower Rates

Mortgage activity in the U.S. eased again last week as interest rates remained largely stable, but borrowers increasingly turned to adjustable-rate mortgages (ARMs) in search of potential savings, according to the latest data from the Mortgage Bankers Association (MBA).

Total mortgage applications dropped 4.7% on a seasonally adjusted basis compared with the previous week. Purchase demand remained steady, dipping just 1% week-over-week but remaining 14% higher year-over-year. Refinancing activity, which surged in mid-September when rates hit historic lows, declined another 8%, though it still sits 18% above the same week in 2024.

“With mortgage rates on fixed-rate loans little changed last week, refinance application activity generally declined, aside from a modest bump in FHA refinances,” said Mike Fratantoni, MBA’s senior vice president and chief economist.

Slight Declines in Fixed Rates

The average 30-year fixed-rate mortgage on a conforming loan (up to $806,500) eased slightly to 6.43% from 6.46%, with points dropping to 0.60 from 0.61, including the origination fee, for borrowers putting down 20%. While modest, these changes reflect continued movement in the market amid uncertainty, and rates remain just 7 basis points below last year’s comparable week.

Despite minor declines, many potential homebuyers remain on the sidelines, contending with high home prices and broader economic uncertainty. Although the supply of homes for sale is higher than a year ago, many sellers are delisting properties or delaying listings, limiting inventory in certain markets.

ARMs Gain Traction

With fixed rates holding steady, riskier adjustable-rate mortgages are becoming increasingly appealing. ARMs generally offer a lower initial rate, often fixed for 5, 7, or 10 years, before adjusting based on market conditions. While they carry the risk of higher payments later, the current rate differential is prompting borrowers to weigh short-term savings against long-term uncertainty.

“The ARM share of applications rose to 9.5% last week from 8.4% the prior week. Our survey shows 5/1 ARM rates averaging nearly a full percentage point below 30-year fixed rates, encouraging more buyers and refinancers to consider them,” Fratantoni noted.

For borrowers weighing the decision, ARMs can offer a strategic advantage for those confident in their near-term financial stability, though financial advisors caution that they are less predictable over the life of the loan compared to fixed-rate options.

Purchase Market Remains Steady

Applications to purchase a home have remained relatively flat over the past few months, reflecting a hesitant buyer environment. Potential buyers are navigating higher prices, rising interest rates, and economic uncertainty, while the gradual uptick in housing inventory has yet to dramatically influence the market.

Experts note that the current slowdown is uneven across regions, with coastal markets still experiencing affordability challenges, whereas Midwestern and Southern metros see more balanced supply and demand dynamics.

Outlook Amid Government Shutdown

Mortgage rates at the start of this week have shown little movement, largely because key government economic reports remain delayed due to the ongoing federal shutdown. Bond markets, which heavily influence mortgage rates, have remained calm in the absence of fresh data, leaving borrowers to monitor developments closely.

“Until the government resumes data releases and economic signals return, mortgage rate volatility is likely to remain subdued, which may continue to influence borrowers toward ARMs as a short-term savings strategy,” Fratantoni said.

In summary, while the broader mortgage market remains stable, borrowers are increasingly turning to adjustable-rate products as a way to capture lower rates amid persistent economic uncertainty. Homebuyers and refinancers alike are carefully weighing short-term financial benefits against longer-term risks, reflecting the delicate balance in today’s housing landscape. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.