MortgageMortgage Rates

Borrowers shift toward jumbo loans, ARMs as mortgage rates rise

Rate lock dollar volume rose 2% in Feb. from Jan. while the number of rate locks declined

Rate and affordability pressures continue to challenge purchase lending, driving homebuyers to alternative loan products.

The number of rate locks was down in February from the previous month, but dollar volume rose due to a rate environment that favored non-conforming loans including jumbo loans and adjustable-rate mortgages (ARMs), according to Black Knight’s originations market report.

Pipeline data from February showed overall rate lock dollar volume up 2% from January, with purchase locks rising 4%. Meanwhile, cash-out refinances fell 11% and rate/term refinances remained near historic lows, Black Knight said.

Combined, refinance locks made up just 14% of the month’s activity, returning to the low point in the cycle that was first reached in October. Overall lock volumes were up 8.6% over the last three months but remain 58.8% off levels from 2022. 

Despite the monthly dollar volume increase in February, purchase lock counts — which exclude the impact of home prices — are down 42% from last year and below 35% from pre-pandemic levels of 2020. 

“As rates resumed their upward trajectory in February, borrowers responded predictably, moving toward more rate-favorable offerings,” Kevin McMahon, president of Optimal Blue, a division of Black Knight, said in a statement. “That included a shift to jumbos, ARMs and other nonconforming products in the month.”

The share of locks with adjustable rates rose in February to 10.3%, while nonconforming loans – consisting of 12.2% of the total loan product mix — picked up share.

Conforming loans dropped to account for 56.6% of loan product mix, FHA loans declined to consist of 18.4%, VA loans and USDA loans fell to 12% and 0.8% of the total mix, respectively. 

Black Knight’s Optimal Blue Mortgage Market Indices showed 30-year fixed rates dipped below 6% for the first time since September before rising 52 basis points to finish the month at 6.68%.

The average loan amount rose from $340,000 to $349,000 in February month over month, while the average purchase price climbed from $421,000 to $434,000. 

“With refinance activity basically at a floor, all eyes are on the purchase market. And yet such lock volumes remain more than 40% down from last year’s level, with the triple-threat of rate, affordability and inventory challenges still looming large for the foreseeable future,” McMahon said.

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