Weekly mortgage applications plunge 7.6% on higher rates

An ad for mortgage assistance at a Bank of America branch in New York.
Scott Mlyn | CNBC
An ad for mortgage assistance at a Bank of America branch in New York.

Interest rates took a tiny step backward last week, but the rise over the past month was enough to deter borrowing. Total mortgage application volume fell 7.6 percent from one week earlier on a seasonally adjusted basis for the week ending May 29, according to the Mortgage Bankers Association. The numbers also include an adjustment to account for the Memorial Day holiday.

Interest-sensitive refinances were hardest hit, falling 12 percent week-to-week to the lowest level in over a year. Refinance volume is now lower than it was a year ago, down just over 1 percent. It had been as much as 8 percent higher annually just the previous week.

This comes as the average contract interest rate for 30-year fixed mortgages with conforming loan balances ($417,000 or less), fell to 4.02 percent from 4.07 percent, with points decreasing to 0.33 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio loans.

"With mortgage rates above 4 percent, refinance volume continues to decline, and with the refinance share at its lowest level in over a year, we have again crossed over into a purchase-dominated market," said Mike Fratantoni, the association's chief economist. "We expect economic growth and importantly wage growth will pick up in the second half of the year, which will provide further support to a growing home purchase market."

Despite future expectations, though, mortgage applications to purchase a home also fell, down 3 percent from the previous week but were still 14 percent higher than the same week one year ago. Home sales have not been as strong as some predicted this spring, but that may have more to do with tight supply than higher interest rates.

Read MoreBuying a home? Don't make these costly mistakes

Interest rates moved sharply higher again Tuesday, even as investors await the all-important monthly employment report on Friday. This may be a defensive position or a reaction to overseas markets.

"Today's [Tuesday's] move is most readily explained by the domestic market's relationship with European markets where economic data and headlines concerning a potential Greek debt deal caused European rates to jump," said Matthew Graham of Mortgage News Daily. "The more it looks like Greece will get some sort of 'deal,' the higher rates go in the stable countries, and it's those countries that have the most direct effect on U.S. rates."