Homebuyers Are Giving ARM Loans a New Look as Mortgage Rates Jump to Their Highest Point In 13 Years

A photo to accompany a story about the latest mortgage rates Justin Sullivan/Getty Images
A for sale sign is posted in front of a home that is listed for over $1 million on April 29, 2022 in San Francisco, California. California's San Francisco Bay Area tops the U.S. in million-dollar home sales, according to a list compiled by the Inspection Support Network. Home buyers struggle to enter the market as home prices and mortgage rates continue to rise.
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  • Mortgage rates rose this week, erasing last week’s drop and hitting the highest level since 2009, at 5.38%.
  • The Federal Reserve, meanwhile, announced its latest steps to rein in inflation, including hiking its benchmark short-term interest rate by 50 basis points.
  • The Fed’s hike doesn’t directly affect mortgage rates, and experts say plans by the central bank to unwind its purchases of mortgage-backed securities have likely already been factored into rates.
  • Homebuyers are increasingly turning to adjustable-rate mortgages (ARM) and other strategies to combat rising rates, although interest rates still aren’t high from a decades-long perspective.

Last week’s drop in the average 30-year mortgage rate was short-lived, as the rate jumped back up this week to the highest level in 13 years.

The average 30-year fixed rate was 5.38%, up 16 basis points from last week. That survey was conducted before the Federal Reserve announced Wednesday that it would raise its benchmark short-term interest rate by 50 basis points.

The Fed’s news doesn’t directly correlate with mortgage rates, says Ace Watanasuparp, national director of strategic sales at Citizens Bank. “It will have an effect, but not a 50 basis point correlation effect. A lot of times rates are baked in prior to the [Fed] meeting.”

This week’s increase in mortgage rates continues a trend of significant hikes, cutting into how much buyers can afford to pay for a home. Rates started the year around 3.3%, near the lowest they’ve ever been, and are now at levels not seen since 2009. Despite the increase, and rising home prices, rates are still low by historical standards and buyers shouldn’t be scared off if they find a home they like and can afford, Watanasuparp says. 

“Get in the game,” he says. “Understand what your options are and take advantage of the low rate environment.”

About the Latest Mortgage Rates

Except where otherwise noted, mortgage rate data in this story is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.

What Does the Federal Reserve’s Rate Hike Mean for Mortgage Rates?

The Fed is raising rates and taking other steps to navigate the economy through the highest inflation in four decades. “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Fed Chairman Jerome Powell said Wednesday. In March, the Fed raised the target for the federal funds rate, which affects how banks lend each other money, by a quarter percentage point, the first hike since the pandemic started. This week it raised it again, by half a percentage point. The Fed indicated it would likely continue to raise the rate throughout the year, although Powell said the central bank isn’t actively looking at hikes of 75 basis points.

Perhaps more relevant to mortgage rates, Fed officials announced plans to start selling certain assets that the central bank had bought to support the economy through the pandemic, including mortgage-backed securities. The central bank’s purchases of those bundles of mortgages on the secondary market helped lenders offer more loans, and the easing of that support could affect mortgage rates, Watanasuparp says. “They kept the market artificially low because of the liquidity they were providing in the secondary market,” he says. “With them not buying any more mortgage-backed securities, it’s going to make the cost of borrowing even more expensive thus raising interest rates a little bit higher as well.”

Mortgage rates could plateau around current levels, Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, predicted in a statement. “The financial markets have attempted to price in the impact of Fed actions over this cycle, and they are likely also pricing in the economic slowdown that will result.”

Expert Forecast: What Will Happen to Mortgage Rates In May?  

The big rise so far this year for mortgage rates likely won’t continue at that speed for too long, experts say. “The increase that we’ve seen over the past couple of months has been unprecedented. We’ve never seen mortgage rates rise as quickly as they have,” Ralph McLaughin, chief economist at Kukun, a real estate technology platform, told us. “[That pace] is very unlikely to continue.”

The big sticking point is what happens with inflation – the same factor that the Fed is working to address. “Until inflation is under control, the risk is certainly that rates move higher,” Danielle Hale, chief economist at Realtor.com, told us.

What Other Mortgage Industry Data Show 

The weekly survey by Freddie Mac showed the 30-year fixed rate average rising 17 basis points to 5.27%. It’s up more than 2.3 percentage points over the last year. 

Freddie Mac is a government-sponsored entity that buys mortgages on the secondary market, and while its survey’s methodology and the time in which it collects data differ from others, such as the Bankrate survey referenced in this article. While the mortgage rate averages vary, they show similar trends over time.

Historical Mortgage Rates: Today’s Rates Are Still Favorable 

Here’s a visual look at how current mortgage rates compare to the last 22 years.

Rates are higher than they’ve been in more than a decade, but compared to where they were before the financial crisis they’re still favorable. It’s also important to consider that they’re relatively low when compared to other types of debt, such as credit cards. “If you look at the market overall, a rate of 5% is still very low,” Watanasuparp says.

What Can Consumers Do as Mortgage Rates Rise?   

Experts say there are a few key strategies you can use as you shop for a mortgage in a rising rate environment. First and foremost, shop around for a mortgage. With rates moving fast, they can vary widely between different lenders. Also consult with experts, working closely with an experienced loan officer and real estate agent, Watanasuparp says. “It is a competitive marketplace overall and you want to make sure you are prepared,” he says.

Buyers are also turning increasingly to loans other than the typical 30-year fixed rate mortgage, Watanasuparp says. Those include adjustable-rate mortgages, which carry more risk but come with a “teaser rate,” typically fixed for several years at the front of the loan, that is lower than the going 30-year fixed rate. “There is a tremendous amount of people now taking advantage of an ARM product if they don’t foresee seeing themselves in that home for 10 years,” he says.

The average rate on a 7/1 ARM, which would carry a fixed rate for seven years and change, with the market, every year thereafter, was 4.2% this week. To avoid being subject to the adjustable rate period, buyers can either refinance or move before it kicks in. Watanasuparp suggests getting one with a fixed term a few years longer than you expect to stay in the house. “Give yourself a little room,” he says.”

Buyers are also increasingly looking at buying mortgage points, or discount points, in which you pay a fee upfront in exchange for a lower interest rate. That can be beneficial only if you plan on keeping the loan – not moving or refinancing – longer than the breakeven point, at which the money you’ve saved from lower interest exceeds what you paid up front. “It really depends on when your breakeven is,” Watanasuparp says.

For existing homeowners, the rise in rates has made refinancing just to save money with a lower interest rate a rarity. Many people are doing so to get cash for debt consolidation or home improvements, Watanasuparp says. With home prices so high, homeowners are more comfortable getting cash to improve their current homes than trying to find a new one, he says. “Most of them are using it to reinvest in their homes.”

Whether you are looking to refinance or purchase, you can compare lender offers here using this Home Loan Comparison Calculator. You can enter in the loan amount, rate, fees, and term for each offer and see a true side-by-side comparison. 

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