Even more borrowers choose riskier mortgages, as higher interest rates crush affordability

In an aerial view, two-story single family homes line the streets of neighborhood on Jan. 13, 2026 in Thousand Oaks, California.

Kevin Carter | Getty Images

Mortgage rates moved to the highest level in nearly three years last week, causing overall demand to drop. Riskier mortgages, however, continue to gain a growing share of what demand there is.

Total mortgage application volume dropped 2.75 last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. It is also 37.5% lower than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances, $832,750 or less, increased to 7.50% from 7.49%, with points decreasing to 0.83 from 0.84, including the origination fee, for loans with a 20% down payment. The rate was more than a full percentage point higher than it was a year ago.

"As a result, borrowers continue to rely more on ARM [adjustable-rate mortgage] loans to help lower their monthly payments," said Joel Kan, an MBA economist in a release. "The ARM share at 10.5 percent was at its highest level since October 2025."

ARMs offer lower interest rates and can be fixed for up to 10 years, but then they adjust depending on future interest rates. That is why they are considered riskier.

Applications to refinance a home loan have been hit hardest by higher rates, as a shrinking pool of borrowers can now find much relief. These applications dropped 0.4% for the week and were 56% lower year-over-year.

Get Property Play directly to your inbox

Applications for a mortgage to purchase a home fell 4% for the week and were 16% lower than the same week one year ago. There are more homes available for sale now, but mostly on the higher end of the market. Supply is also rising not because of new listings, but because of slower sales. Home prices also continue to rise.

While closed home sales rose very slightly in August from July, according to a report Tuesday from the National Association of Realtors, those sales were based on market conditions over the summer, when rates were lower.

"Despite the small monthly gain on a seasonally adjusted basis, August and September marked the two slowest months for home sales this year," said Lawrence Yun, NAR's chief economist in a release. "Further increases in mortgage rates in recent weeks mean fewer buyers can qualify to purchase a home."