The Major Risk Aspiring Homeowners Are Suddenly Taking

The number of individuals opting to take out high-risk home loans is on the rise due to their low upfront rates, but that could prove to be dangerous later on when those rates adjust to market level over the course of 5 or 10 years.

By Gabriella Acuna | Published

Demand for risky adjustable-rate mortgages, or ARMs, has increased as mortgage rates continue to sky-rocket. The high-risk home loans offer home buyers a fixed lower interest rate for the first five to ten years and afterward adjust to the current market rate. Before home loan interest rates spiked over the past year, ARMs weren’t particularly in demand since rates were already low, so home buyers didn’t feel the need to take on that risk. 

Last week, overall mortgage demand dropped, with application volume dropping by two percent from the week before it. The rising interest rates have made buyers hesitant, as 30-year fixed-rate mortgages with conforming loan balances at 6.81%. High-risk home loans seem like the best option for those families intent on buying a home in the current market as rate hikes don’t seem to be going away anytime soon. 

September showed an upward trend in the job market, with income growth to support it. For the housing market, this is good news since higher-paying jobs result in a higher demand for housing. ARMs are currently offering initial fixed interest rates of 5.56%, which is significantly lower than the traditional 30-year fixed-rate mortgages, making high-risk home loans more attractive to potential buyers. 

Last month high-risk home loans made up 12% of housing applications, but at the beginning of the year when rates were lower, the same loans only made up 3% of the total housing applications. Refinancing has also taken a hit with the current interest rates, with demand down by 86% when compared to last year. 

Not many homeowners benefit from refinancing their mortgages right now; one mortgage technology and analytics firm, Black Knight, said that “there are barely 150,000 borrowers” that would benefit from doing so since most have much lower rates already, reported CNBC. At this time last year, mortgage applications were 39% higher. As buyers have continued to hold off on purchasing a home due to climbing interest rates, high-risk home loans have continued to rise in demand. 

high-risk home loans household debt

High-risk home loans may seem like the only feasible option for those looking to buy as affordability continues to slip away. On the upside, home prices have started to even out. At the beginning of the year, homes were selling for hundreds of thousands of dollars more than they were several months before then. 

Despite the decrease in home prices, buyers are still wary since the prices can continue to drop and essentially make homes purchased in the current market lose a significant amount of value. The possibility and speculation surrounding an upcoming recession has also made potential home buyers hesitant to purchase a home. Locking in interest rates that high-risk home loans are currently offering may seem like one of the most reasonable options given all of the current variables. 

On Thursday, an updated inflation report is set to be released, as 30-year fixed mortgage rates seem to be over 7%. Depending on the results in the report, mortgage interest rates could go either way. High-risk home loans didn’t make sense for most home buyers at the beginning of the year, but for now it looks like they may be the best bet.