Why are US borrowers turning to riskier mortgages as rates climb?

• The average 30-year fixed mortgage rate rose to 7.12 per cent, its highest level since May 2024.
• Total mortgage applications fell 1.5 per cent, while home purchase applications dropped 1 per cent.
• The share of borrowers choosing adjustable-rate mortgages rose to 9.8 per cent as cheaper initial rates attracted more buyers.

US mortgage rates have moved above 7 per cent, putting fresh pressure on homebuyers as higher borrowing costs push some borrowers toward adjustable-rate loans.

The average rate on a 30-year fixed-rate mortgage with a conforming loan balance rose to 7.12 per cent last week, up from 6.97 per cent the previous week and the highest level since May 2024, according to the Mortgage Bankers Association (MBA).

The increase was reflected in mortgage demand. Total applications fell 1.5 per cent from the previous week, while applications to purchase a home declined 1 per cent. Purchase applications were also 11 per cent lower than the same week last year.

For people already paying a mortgage, refinancing has become even less attractive. Refinance applications fell 3 per cent over the week and were 62 per cent below the same period last year, reaching their slowest pace since February 2025.

A cheaper loan with a future catch

The most notable change is happening in the type of mortgage borrowers are choosing.

The share of applications for adjustable-rate mortgages, or ARMs, rose to 9.8 per cent, up from 8.4 per cent the week before. During the first years of the pandemic, when mortgage rates were at historic lows, ARMs accounted for only around 3 per cent of applications.

The attraction is clear. The average rate for a 5/1 ARM fell to 6.10 per cent, more than a percentage point below the 30-year fixed rate.

An ARM typically offers a fixed interest rate for an initial period before the rate can adjust according to market conditions. That means the lower starting rate can reduce borrowing costs initially, but borrowers take on the possibility of higher payments when the loan resets.

Mike Fratantoni, senior vice president and chief economist at the MBA, said higher fixed rates were prompting more borrowers to opt for ARMs.

The shift comes as the fall housing market gets underway, traditionally the second-busiest period of the year after spring. But higher borrowing costs are making it harder for prospective buyers to enter the market.

Mortgage rates have also shown some signs of easing at the start of this week. Mortgage News Daily put the average top-tier 30-year fixed rate at 7.17 per cent on September 22, down slightly from 7.19 per cent the previous day. It linked the move partly to lower oil prices and falling bond yields.

For buyers, however, the bigger issue remains affordability. With fixed mortgage rates still around 7 per cent, even a small movement in rates can affect monthly payments and the amount a household can afford to borrow.

The latest application figures suggest that some buyers are responding not by leaving the housing market altogether, but by looking for cheaper ways to finance a purchase, even if that means taking on more interest-rate risk.