"Refinance application volume dropped last week, as many lenders are now offering rates above 4 percent, which has been an important demarcation line in terms of the level of activity," said Michael Fratantoni, chief economist for the MBA.
Mortgage applications to purchase a home, an indicator of future home sales, fell 2 percent from the previous week, but are one percent higher than the same week one year ago. This as weather across much of the Northeast and Mid-West warmed, and more buyers came out to shop for homes. A rise in mortgage rates can spur home buying, as shoppers worry that if they wait too long, they will lose out on low rates. That does not appear to be happening now, as the market is severely hampered by a lack of homes for sale.
Read MoreMortgage applications point to more buyers
Mortgage rates appear to be playing little role in home purchase activity, but they are affecting refinance volume, as so many borrowers already took advantage of record-low rates in the last two years. Refinance applications are up nearly eleven percent from a year ago, when mortgage rates were above 4 percent but are down 15 percent in the last month as rates moved off recent lows.