The average rate on a traditional 30-year fixed mortgage just rose above 7.1% — the highest it’s been in more than two years. That’s pushing more people toward adjustable-rate mortgages, where the rate changes typically after five, seven, or 10 years.
Nearly 10% of people who applied for a mortgage last week went for an adjustable rate, according to the Mortgage Bankers’ Association. That’s up from 8% a month ago.
It makes sense given how high rates are on a 30-year fixed, said Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania.
“Seven percent is a daunting number, and an adjustable-rate mortgage is 6%, plus some change,” she said.
That can make a big difference in affordability. But adjustable-rate mortgages can be risky, she noted. “A 6% loan today could, depending on the term, in five years be 8.10%, and that is likely to be not affordable.”
A lot of people take out an adjustable-rate mortgage betting that rates will drop before their loan adjusts, and they’ll be able to refinance, according to Chris Mayer, professor emeritus at Columbia Business School and CEO of Longbridge Financial.
“That can be a dangerous game,” he said. “It’s not simple to predict mortgage rates.”
They could easily go up rather than down. He also said that there’s always the possibility that home prices could fall.
“And if home prices fall, you’re also not going to be able to refinance, particularly if you didn’t have a huge down payment,” he said. “So there’s all sorts of risks that people should really be cognizant of.”
Especially if they’re doing it in search of affordability.
