The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.89 percent, the lowest level since May 2013, from 4.01 percent, with points decreasing to 0.23 from 0.28 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
"In addition to the drop in rates, and news of improvement in the job market, there was additional positive news for prospective homebuyers with evidence that credit availability has increased somewhat, and with FHA's announcement of a decrease in their mortgage insurance premiums," added Fratantoni.
The FHA does not originate, but insures loans with down payments as low as 3.5 percent. The drop in FHA premiums of a half percentage point does not go into effect until January 26th, but borrowers will be able to cancel their current case numbers and reapply on the 26th, meaning that if they lock in a low rate now, they can take advantage of the premium reduction later.
"It might make perfect sense. There is no cost to cancel and no cost to reapply," said Brian Sullivan, a spokesman for the Department of Housing and Urban Development.
Sullivan, however, warned that for those who already have FHA loans in process, there could be hidden costs to reapplying, especially if their closings are before or close to the date of the premium change.
"If your closing is too soon it might cost you in the moving van, shifting the closing date, extending the rate lock. It could impact the appraisal that underwrites the property, which may have an expiration date," added Sullivan, who suggests borrowers contact their lenders to get all the necessary information.
While FHA loan applications rose far less than those for loans backed by Fannie Mae and Freddie Mac, that may change in the coming weeks, as borrowers who already have FHA loans seek to refinance under the lower premiums. FHA already offers a streamlined refinance program for loans it currently backs, cutting out much of the costly paperwork.
"It's a really big deal. Current FHA borrowers would need to refinance, but in most cases, it will be well worth the trouble. The monthly savings from a 0.5 basis point drop in mortgage insurance is substantial," said Matthew Graham of Mortgage News Daily. "The fact that rates are at long-term lows is the clincher. If rates were significantly higher than the past few years, it would only be a benefit for new purchases."
The refinance share of mortgage activity increased to 71 percent of total applications last week from 65 percent the previous week, according to the MBA. The new FHA premiums could push that share even higher, and create considerable new business for lenders. A spike in business, however, could allow lenders to push interest rates slightly higher.