Buyers are taking on riskier adjustable rate mortgages as affordability worsens

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Madison Ventures+ Managing Director Mitch Roschelle weighs in on skyrocketing mortgage rates and rent prices.

Homebuyers in the U.S. are turning to riskier adjustable rate mortgages (ARMs) as high interest rates make it less affordable for purchasers locking in new fixed rate mortgages, according to a new report.

The Mortgage Bankers Association's Market Composite Index, which measures loan application volume, found that the share of activity involving ARMs increased to 7.8% of total mortgage applications.

«One notable trend is that the ARM share has reached its highest level for the year at 7.8 percent,» Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association (MBA), said in a release. «Prospective homebuyers are looking for ways to improve affordability, and switching to an ARM is one means of doing that, with ARM rates in the mid-6 percent range for loans with an initial fixed period of five years.»

Average interest rates for ARMs that are fixed for the first five years fell to 6.60% from 6.64%, with points decreasing to 0.75 from 0.87 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate declined from last week, the MBA noted.

HOMES ARE NOW AFFORDABLE IN JUST 6 MAJOR AMERICAN CITIES

Adjustable rate mortgages (ARMs) are in higher demand as borrowers look to riskier mortgages as a means of saving money in the near term. (Joe Raedle/Getty Images / Getty Images)

ARMs are a type of mortgage with an interest rate that changes, or «adjusts,» throughout the duration of the loan. In certain circumstances this can save borrowers money relative to a fixed rate mortgage, but they can also cause a borrower's payments to quickly increase if