With the 30-year fixed rate at 7.12%, a two-year high, the share of applicants taking adjustable loans jumped to 9.8%. Refinancing has nearly dried up.
American homebuyers are reaching for a product they largely abandoned during the pandemic.
Adjustable-rate mortgages made up 9.8% of applications last week, up from 8.4% the week before, according to the Mortgage Bankers Association. During the first years of the pandemic, when fixed rates were setting record lows, the adjustable share was barely 3%.
The reason is price. The average contract rate on a 30-year fixed mortgage with a conforming balance rose to 7.12% in the week ended Sept. 18 from 6.97%, the highest level since May 2024. The rate on a five-year adjustable loan fell 13 basis points to 6.1% over the same week.
"With fixed rates much higher, more borrowers opted for ARMs, with the ARM share reaching 9.8%, as rates for 5/1 ARMs were more than a percentage point lower than those for fixed rate loans," said Mike Fratantoni, the MBA's chief economist.
That discount carries a trade. An adjustable loan typically holds a fixed rate for an initial period of up to 10 years and then resets higher or lower depending on market rates at the time. Borrowers choosing one today are accepting uncertainty later in exchange for a lower payment now.
The rest of the survey showed a market pulling back. Total application volume fell 1.5% from the prior week. Refinance applications dropped 3% and were 62% below the same week a year ago, the lowest level since February 2025. Purchase applications fell 1% and were 11% lower than a year earlier. A year ago, the 30-year rate was 78 basis points lower.
"Seven percent is significant simply because of the psychological effect of people seeing that number be the first digit," said Daryl Fairweather, chief economist at Redfin.
Mortgage rates track the 10-year Treasury yield, which climbed on Wednesday to its highest level since 2007 after a strong reading on business activity. Fed Governor Michael Barr cited the 7.12% rate in a speech the same morning, describing it alongside limited supply as a headwind to affordability. Economists at Nationwide expect mortgage rates to remain around 7% at least through the end of this year.
Housing-linked stocks absorbed the move. The State Street SPDR S&P Homebuilders ETF fell about 1.6%, with 30 of its 35 holdings lower. Home-furnishings retailer Wayfair dropped about 7%. Sales of previously owned homes fell in August to their weakest pace in more than a year, and builder confidence this month matched its lowest level since late 2022.
Economists differ on how much further demand can fall. Hannah Jones, a senior economist at Realtor.com, said the market is "so close to the bottom at this point" and does not expect demand to "fall off a cliff," since marriages, divorces and job moves keep some buyers active in any rate environment.
The adjustable-rate share offers a live gauge of that resilience. If it keeps climbing, buyers are stretching to stay in the market. If it stalls while purchase applications keep falling, the stretching has run out.