Higher Rates Push Buyers to ARMs

Recent data reveals a significant trend: as interest rates rise, a growing number of US homebuyers are opting for adjustable rate mortgages (ARMs). For the week ending September 18th, total mortgage applications dropped by nearly 2%, marking the third consecutive weekly decline. Applications for home purchases specifically fell by 1% and are down 11% compared to a year ago, while refinancing applications hit their lowest point since February 2025. This downturn is directly linked to the sharp increase in interest rates, with the average 30-year fixed rate mortgage climbing to 7.12% from 6.97%, the highest since May 2024.

Borrowers are increasingly choosing ARMs, which now account for 9.8% of applications, because their initial rates are often more than a percentage point lower than fixed rate loans. ARMs offer a lower fixed rate for an initial period (three to ten years) before adjusting based on market conditions, providing upfront savings but introducing future rate volatility. These rising mortgage rates are largely influenced by surging Treasury bond yields, which have increased since a joint military operation launched in late February. The benchmark 10-year Treasury yield recently hit 5%, up from 3.96% before the conflict began.

Looking ahead, global energy markets and inflation data are key factors that will shape future interest rate decisions by the Federal Reserve. Jeff DerGurahian, head economist at loanDepot, notes that softer inflation and lower oil prices could offer some relief, while continued energy pressure could keep mortgage rates at or above 7%. The upcoming August personal consumption expenditures (PCE) price index and September consumer price index reports will be crucial. The Cleveland Fed projects annual headline consumer inflation to reach 3.5%, while core inflation is expected to remain steady at 2.4%. Investors are currently anticipating another quarter point rate hike at the October Federal Open Market Committee meeting, though this could change if inflation readings come in softer than expected or oil prices decline.

I think what stands out here is the clear impact of external global events on our local housing market. It's a stark reminder of how interconnected everything is and how quickly economic conditions can shift buying strategies for everyday people. The housing market is dynamic, it’s alive! The idea is to stay educated on the big picture and as you narrow down your options on an actual purchase press your lender to know all the options so you can adjust in real time.