Adjustable-rate mortgages becoming more attractive to buyers

The Federal Reserve’s string of interest rate hikes this year has thrown cold water on the once red-hot housing market.

Existing home sales fell for the seventh straight month in August, down 0.4%, according to the National Association of Realtors, as the central bank aggressively raises interest rates to cool the economy and drive down high inflation. That has led to higher mortgage rates, increasing borrowing costs for home buyers by hundreds of dollars a month.

The average rate on a 30-year fixed-rate mortgage has more than doubled since the beginning of the year and was at 6.02% for the week ending Sept. 15, according to housing finance agency Freddie Mac.

"The latest Fed rate hike could continue to have an impact on affordability," Glenn Brunker, president of the financing company Ally Home, told ABC News.

While home prices have fallen from their springtime peaks in some markets, prices remain above where they stood a year ago.

The median sale price of an existing home in August was $389,500, down from $403,800 in July but still 7.7% higher than the same time last year. As home demand falls, the inventory of homes for sale has increased and homes are sitting on the market longer.

"So that bidding war that may have cost you more than a rate increase a few months ago is less likely to happen today," Brunker said. "However, while home prices are moving down on a relative basis, they are not moving down as fast as rates are moving up."

According to the Mortgage Bankers Association, adjustable-rate mortgages (ARMs) made up nearly 10% of all new home loan applications as of mid-2022. As interest rates rise, adjustable-rate loans become more attractive to buyers who prefer not to lock in a high rate.

When considering an ARM, experts said buyers should be aware of the loan's cap, which limits the total amount a rate can increase after the fixed rate period has expired. It is designed to protect buyers against sharp increases when the adjustable period begins.

If you’re house hunting, Brunker recommended getting pre-approved for a mortgage.

"Having a pre-approval letter in hand is important when buyers are ready to place an offer on a home in a fast-moving market," Brunker said. "It shows sellers that a buyer is serious about purchasing and also that a lender is committed to financing their home."

Experts continue to point to the need for more housing to ease the inventory shortage but the latest numbers are not encouraging.

Confidence among homebuilders fell in September for the ninth straight month, according to the National Association of Homebuilders. Residential permits, which can be a bellwether for future home construction, fell 10% in August, according to the Commerce Department.