Rising interest rates are prompting more home buyers to turn to adjustable-rate mortgages—which come with potential financial risks. Though these mortgages typically come with lower interest rates initially, they reset to market rates after five or seven years, potentially shocking borrowers with much higher costs.
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The percentage of borrowers with ARMs rose to 8.2 percent in October, up from 7.2 percent in September, according to Ellie Mae’s newly released Origination Insight Report. “As interest rates continue to rise, the percentage of adjustable-rate mortgages is increasing, as home buyers are looking to take advantage of the best rates from their lenders,” says Jonathan Corr, president and CEO of Ellie Mae, a cloud-based platform for the mortgage finance industry. Freddie Mac reported last week that the 30-year fixed-rate mortgage averaged 4.81 percent compared to a 4.09 percent national average for 5-year ARMs.
Ellie Mae’s report also showed that the time to close on all loans is on the rise: 45 days in October, up from 44 days in September. Broken out, the time to close on a purchase loan rose to 46 days, while the time to close on a refinance loan increased to 43 days.
Also, the report showed that FICO scores of applicants averaged 727 in October. “FICO scores remain the highest we’ve seen in 2018, indicating that lenders are not yet loosening credit availability to attract the shrinking refinance market,” Corr says. “We’ll continue to watch this trend into the winter months.”