Mortgage applications at highest level since January

Mortgage applications soared to the highest level since January last week, thanks to the lowest interest rates since February. Total volume rose 9.5 percent for the week ended March 20 from the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA).

Applications to refinance loans increased 12 percent week to week and are up 35 percent from a year ago. Applications for mortgages to purchase a home, which are an indicator of future home sales, rose 5 percent and are now 3 percent higher than a year ago.

"Low mortgage rates and more importantly continued improvements in the job market are the likely drivers behind this increase, " said Michael Fratantoni, chief economist for the MBA.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.90 percent from 3.99 percent, with points decreasing to 0.37 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, according to the MBA survey.

The move down in rates certainly opened the door for borrowers refinancing, but homebuyers have been less affected by these small moves. They may, however, be more sensitive to rates once rates begin to move higher, which they are expected to do at some point this year. Rising home prices are already squeezing affordability, and making rates ever more important.

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"Affordability is greatly impacted by mortgage rates, so waiting a year to buy as affordability declines may force homebuyers to consider alternative options such as hybrid-adjustable mortgages that have lower rates," said Jonathan Smoke, chief economist for Realtor.com "Many first-time buyers are also challenged by having the funds for a down payment. While there are low down payment mortgage options, a disadvantage of a low down payment is higher monthly payments."

Realtor.com released a report Tuesday showing mortgage affordability was best in Detroit, worst in San Francisco.