As Interest Rates Soar, Homebuyers Turn to Variable Rate Mortgages |
Home prices are falling rapidly in some of the most expensive real estate markets, such as the Bay Area of California, but interest rates are rising, meaning that for many, their dream home is now out of reach. their price range.
But some buyers have found a solution: adjustable rate mortgages, which guarantee lower monthly payments in the first years of a mortgage.
Although adjustable loans are riskier than traditional fixed-rate mortgages, real estate experts say most buyers who choose them are in good financial shape and are unlikely to default if their rates rise. . Additionally, tighter regulations in the wake of the 2008 housing crash are giving housing seekers greater protection against predatory lending.
“Almost every buyer I worked with after March of this year opted for a (variable rate mortgage) instead of a fixed one,” said Sunil Sethi, a real estate agent in Fremont, Calif.
Nationally, a recent Zillow report found that 12% of all mortgage applications in July were for adjustable loans, the highest share since August 2007.
Currently, borrowers can take advantage of an average interest rate of 4.36% for a conforming 5/1 adjustable mortgage – where the rate remains the same for five years before being adjusted annually for the remainder of the term. term of the loan. That compares to a rate of 5.55% for a conforming 30-year fixed mortgage, according to Freddie Mac.
Even this seemingly small difference can result in monthly payments that cost hundreds or even thousands of dollars less, depending on the price of a home. But once the fixed term for adjustable mortgages ends, rates – which are tied to various economic indicators – can suddenly jump.
The hope is often that fixed rates will have come down by then so homeowners can refinance.
Nicole Bachaud, senior economist at Zillow, said federal mortgage data shows that homeowners who take out adjustable loans tend to have higher incomes and make larger down payments and, in turn, should be able to pay more. assume this risk.
“These people are much more financially stable — there’s less of a chance of having a negative outcome because of their financial well-being,” she said.
Bachaud added that caps on rate adjustments and other restrictions on subprime lending in the wake of the housing crash 14 years ago should allay fears that the rise in adjustable mortgages is a sign harbinger of a coming stock market crash.
The continued rise in mortgage rates – now double the historically low rates below 3% available at the height of the pandemic – has squeezed many buyers out of the market as the Federal Reserve has raised the cost of borrowing in recent months in the purpose of slowing galloping inflation. And that pullback in buyers has chilled the Bay Area’s record pandemic real estate market in recent months.
In July, the median price of existing single-family homes in the Bay Area fell 6% from June to $1.28 million, according to the latest data from real estate analytics firm CoreLogic.
San Mateo County – the most expensive market in the Bay Area of five counties – saw the median price drop 8%, from just under $1.83 million in May to 1.68 million dollars in June. San Francisco went from $1.8 million to $1.63 million, Santa Clara went from $1.74 million to $1.62 million, Alameda went from $1.32 million to 1 $.25 million and Contra Costa — the most affordable of the central Bay Area counties — went from $900,000 to $860,000.
Sethi, the Fremont realtor, said many homebuyers taking out adjustable mortgages are betting the broader trend will eventually reverse.
“Their thought process is that whatever is happening in the economy right now is going to change, and when that changes, rates are going to go down, and they can refinance when that happens,” he said.
San Mateo County Officer Jeff Lamont also saw more buyers turn to five- and seven-year variable-rate mortgages as rising interest rates reduced their purchasing power.
For some buyers, he said, the loans are attractive either because they are buying a first home or because they plan to move again soon.
“One school of thought,” Lamont said, “is why pay a 30-year fixed-rate mortgage if you’ll only be in it for 5-7 years?”