RALEIGH – Would-be homebuyers are facing headwinds in navigating the Triangle’s real estate markets. But there is one possible solution to help keep financing costs manageable.
Adjustable rate mortgages—or ARMs.
Well, adjustable rate mortgages begin at a lower rate than fixed rate mortgages. According to the latest Freddie Mac data, the typical adjustable rate mortgage is now 3.78% while a typical mortgage interest rate for a 30-year fixed loan at 5.1%.
“Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices,” Joel Kan, associate vice president of economic and industry forecasting at the the Mortgage Bankers Association, said in a statement.
Nationwide, the latest data from the Mortgage Bankers Association shows that mortgage loan applications decreased by 8.3% on a seasonally-adjusted basis from the prior week.
But ARMS surged to 9% of the total purchase applications filed during the week. That’s double the rate from three months ago, said Kan.
Adjustable rate mortgages are often available to borrowers at a lower interest rate than fixed rate mortgages. According to the latest available data from Freddie Mac, the typical adjustable rate mortgage is now 3.78%.
Since adjustable rate mortgages offer lower beginning rates than regular fixed mortgages. That can reduce your monthly payment by hundreds of dollars. With prices and interest rates both on the rise, local mortgage lender Dan Woodard can see the appeal.
“People that two months ago could qualify for a half a million dollar mortgage, maybe can only qualify for $450,000, or maybe even less now. So they’re not getting the house they want. And an ARM might be a way to get you into the product,” said Woodard, with CIMG Residential Mortgage.
For certain buyers, he says, an ARM can make sense and save a little money.
“If you, for example, move a lot for work so maybe you’re only going to be in the location for two or three years and you’re very confident that that’s the case,” he said.
But for average buyers, ARMs carry a lot of risk. After the initial period at the lower rate, typically five to seven years, the interest rate can more than double.
“If you take an arm at 4%, the rate can go up 5%, now you’re 9%, that’s going to be a big sticker shock to your payment,” he said.
Many borrowers count on refinancing the loan during the initial period. But if interest rates continue to rise as expected, refinancing may not be an affordable option, either. And Woodard says some ARMs have pre-payment penalties. They can be complicated loans with a lot of fine print.
“If you don’t have a trusted lending advisor to help you through, you know, an arm, you can really get yourself into a tight spot,” said Woodard.
Interest rate can affect purchasing power
A Redfin study from earlier this year found that a typical Raleigh homebuyer would lose purchasing power when mortgage rates increased.
That Redfin study looked at the effect on the maximum offer price a homebuyer could make if mortgage interest rates rose from 3.5% to 3.9% on a 30-year fixed mortgage and the buyer was limited to spending $2,000 monthly on housing costs.
But typical mortgage rates at the time of the Redfin study were 3.5%. Now, they’re 5.1% for a 30-year fixed rate.
A homebuyer in Wake County purchasing at the median sale price of $430,000 with a 20% down payment would seek a mortgage loan for $344,000.
At 5.1%, the homebuyer’s monthly payment for mortgage principal and mortgage interest would be about $1,870. But at a mortgage interest rate of 3.78%, the monthly payment would be about $1,600, or a difference of roughly $270 per month.
There’s a caveat, however. while a fixed-rate mortgage remains the same interest rate for the duration of the loan, an adjustable rate mortgage may see fluctuations in its interest rate over time.
Refinancing activity also dropping
It’s not just purchase applications that have fallen amidst rising mortgage rates. Mortgage refinance applications decreased by 9% from the prior week, but were 71% lower than the same week in 2021, the data showed.
“With mortgage rates increasing last week to the highest level since 2009, applications continued to decline,” Kan explained. “Overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines.”
In Wake County, the data from the Register of Deeds showed that March 2022 was a strong month when it came to lending activity, with an increase of 12% in the number of filings for deeds of trust, the legal instrument used by mortgage lenders to secure the mortgage loan against property.
Luther Snyder, the deputy director of the office of the Wake County Register of Deeds, told WRAL TechWire that the office will be tracking whether deed of trust filings will increase or decrease in April, as mortgage interest rates spiked during the month.
According to the latest report from the Wake County Register of Deeds, there were 5,465 deed of trust transactions in March 2022, compared to 4,764 in February 2022. The median sale price of real estate in Wake County was $430,000.