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With interest rates up, homebuyers turn to adjustable-rate mortgages

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Bay Area home prices are falling rapidly, but interest rates are rising. That means, for many people, their dream home is out of their price range.

However, some buyers have found a solution. It is a variable rate mortgage that guarantees lower monthly payments for the first few years of the mortgage.

While adjustable loans are riskier than traditional fixed-rate mortgages, real estate experts say most buyers who opt for adjustable loans are in good financial shape, and interest rates have skyrocketed. If it does, it is unlikely that it will default on its obligations. In addition, stricter regulations following the 2008 housing crash have further protected job seekers from predatory loans.

“Since March of this year, almost every buyer I have worked with had[a variable rate mortgage]instead of a fixed rate,” said Fremont real estate agent Sunil Sethi. .

Nationwide, 12% of all mortgage applications in July were adjustable loans, the highest share since August 2007, according to a recent Zillow report.

Currently, borrowers can take advantage of an average 4.36% interest rate on matching 5/1 adjustable mortgages. The interest rate will remain the same for his 5 years and the rest of the loan term will be adjusted annually. This compares to a matching 30-year fixed mortgage rate of 5.55%, according to Freddie Mac.

Depending on the price of your home, even seemingly small differences can result in hundreds or even thousands of dollars in lower monthly payments. However, when the fixed term of adjustable mortgages ends, interest rates associated with various economic indicators can rise suddenly.

In many cases, the hope is that fixed rates will have fallen by then, allowing homeowners to refinance.

Nicole Bashaw, senior economist at Zillow, said federal mortgage data showed that homeowners with adjustable loans tended to have higher incomes and larger down payments and were more likely to take the risk. says it should be possible.

“These people are much more financially stable. They are less likely to have negative outcomes because they are better off financially,” she said.

After capping interest rate adjustments and restricting risky lending in the wake of the housing meltdown 14 years ago, Bachaux says the rise in adjustable mortgages is a harbinger of an upcoming market crash. It should allay concerns, he added.

Still-rising mortgage rates (history lows available at the height of the pandemic) as the Federal Reserve (Fed) has raised the cost of borrowing in recent months and seeks to slow down. 2x interest rates (less than 3% of interest rates) keep many buyers out of the market. runaway inflation. And with that buyer pullback, the Bay Area’s record-breaking pandemic real estate market has cooled in recent months.

The median price of existing single-family homes in the Bay Area fell 6% from June to $1.28 million in July, according to the latest data from real estate analytics firm CoreLogic.

San Mateo County — the Bay Area’s most expensive market of the five counties — has its median price down 8% from just under $1.83 million in May to $1.68 million in June. San Francisco fell from $1.8 million to $1.63 million. , Santa Clara dropped from $1.74 million to $1.62 million, Alameda from $1.32 million to $1.25 million, and Contra Costa, the most affordable of the Bay Area core counties, from $900,000 to $860,000.

Fremont real estate agent Sethi said many homebuyers are betting that the volatility in mortgages will eventually reverse.

“Their thought process is that whatever is happening in the economy right now will change, and when it changes, interest rates will go down and they can refinance when that happens,” he said.

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