Want a lower mortgage rate? Borrow bigger (or gamble on an ARM)

Mortgage rates across the board are at a 15-year high, with a traditional 30-year fix hitting an average of 6.7% last week, according to Freddie Mac’s weekly rate report. But some unusual dynamics are playing out in the current mortgage lending environment. One of them is rates being offered on large loans.

Jumbo loans, those up to $970,800 in the D.C. region, carry average rates that are currently less than average rates on conforming loans. One of the reasons is because the stock market is doing so poorly right now.

“The reason why rates on these jumbo products are lower than on conforming rates is because there is investor demand. It is a very odd economy that we are working in right now, in a market where traditional investments seem sort of out-of-whack,” said Lisa Sturtevant, chief economist at Rockville-based listing service Bright MLS.

Another caveat in the current high-rate environment: how aggressively banks are competing on rates.

With a drop in buyers — and more significantly for lenders, a big drop in refinancing activity — refinancing has dropped from about two-thirds of all mortgage applications to about one-third.

The National Association of Realtors said the difference in rates different lenders are offering for the same loan products is the widest it has been in five years, signaling the importance for borrowers to compare rates.

There is also the rise in interest for adjustable-rate mortgages. Though still a small share of loan products borrowers are choosing, the share is increasing — and not for the same reasons ARMs became popular in the early- and mid-2000s.

“Adjustable-rate mortgages used to be more common among borrowers who had less-than-stellar credit or had trouble qualifying for a conventional 30-year loan. But now we are seeing the gap between the rate offered on an adjustable-rate mortgage and conventional mortgages widen to the biggest gap we’ve seen since 2013,” Sturtevant said.

Adjustable-rate mortgages can be time bombs. But in the current rate environment, they may be a good bet.

A five-year adjustable-rate mortgage, the most common ARM lenders underwrite, has a rate — currently lower than fixed-rates — that resets on the five-year anniversary, and periodically throughout the remaining course of the loan, typically every six months.

If rates fall from current levels a few years from now, it would be an unusual win.

“You have these opportunities to reset to the new rate after the five-year term. But you also have the opportunity to refinance. So if we see fixed rates go down to within a four percent range, then you can win by refinancing as well,” Sturtevant said.

Adjustable-rate mortgages could also start going up after that initial five years if rates in general do.

ARMs do have some built-in protections, including a limit to how much the rate can go up at each reset — but that varies.

Sturtevant said the most important thing consumers need to know about an ARM isn’t the initial rate: It’s the fine print about how much, and how often, that rate can be reset.

One group of buyers for whom adjustable-rate mortgages present the least risk are those who don’t expect to stay in the home longer than the initial term of the mortgage.