Borrowers opt for FHA loans, ARMs as mortgage market stagnates

As conventional mortgage rates stagnate, borrowers are opting for alternative loans to more affordably finance their homes.

In the week ended Feb. 6, overall mortgage applications were 0.3% lower than a week earlier, according to the Mortgage Bankers Association's weekly survey data released on Wednesday. It's the second straight week of decreases in the survey data.

The slowdown comes after the market had a hot start to the year, with multiple weeks of double-digit weekly increases in mortgage demand, and it mirrors a similar trend of stagnation in mortgage rates. Since Jan. 1, mortgage rate averages have stayed in a narrow five-basis-point range.

At first, that narrow range had average rates low enough to spark a surge in refinance and purchase applications, but the initial excitement has worn off, according to Joel Kan, the MBA's vice president and deputy chief economist. The latest MBA data showed that refinance applications were up just 1% from the previous week, while purchase applications were 2% lower.

That decline came as "borrowers held out for another drop in rates or shifted to other loan types," Kan said in a statement Wednesday.

Indeed, last week, the share of Federal Housing Administration loans increased to 18.4% of all applications. At the same time, the share of adjustable-rate mortgages climbed to 8%, marking a seven-week high. 

"Borrowers are increasingly utilizing FHA loans as affordability challenges remain, despite recent improvements," Kan explained. "Similarly, the ARM share increased...with ARM rates almost a percentage point lower than fixed rates."

FHA loans have a lower down payment requirement and can be easier to qualify for when compared to conventional loans. They also typically offer a lower interest rate than conventional loans. For example, on Tuesday, the daily 30-year, fixed-rate mortgage was going at a 6.11% rate while the 30-year, FHA loan was at 5.69%, according to Mortgage News Daily.

Similarly, ARMs are another avenue for borrowers to capitalize on lower mortgage rates. Unlike fixed-rate mortgages that come with a set interest rate, ARMs are characterized by their variable interest rates. An ARM allows a borrower to lock in one rate for a set period — five or seven years, for example — and that rate is usually lower than you would get with a conventional, fixed-rate loan.

As of Tuesday, Mortgage News Daily reported that daily measures of mortgage rates had declined across the board, with the 30-year, fixed-rate mortgage falling to a three-week low. Whether that trend continues, though, is contingent on the results of Wednesday's jobs report, according to Matthew Graham, chief operating officer at Mortgage News Daily and a former loan officer.

"If it is weaker than expected, there's certainly room for the rate rally to continue," he wrote in a post, "but if the report shows resilience, rates would likely bounce back higher."