Real Estate

As housing market struggles, the rich are refinancing

How is your mortgage rate determined?
How is your mortgage rate determined?

Mortgage interest rates bumped decidedly back over 4 percent last week, causing a drop in both mortgage applications to refinance and to purchase a home.

Total application volume fell 6.6 percent from the previous week, on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA). Refinance applications were off 7 percent week-to-week, after soaring in previous weeks, thanks to lower interest rates.

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The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.13 percent from 4.10 percent last week, according to the MBA. Some borrowers were still getting loans in the 3 percent range just two weeks ago.

Home ownership hits new lows
Home ownership hits new lows

That brief drop in mortgage interest rates was a boon largely to wealthier borrowers with big home loans. Applications to refinance jumbo loans (those with balances largely above $729,000) soared almost 130 percent two weeks ago; they fell, consequently, 41 percent last week amid higher rates.

"Borrowers with jumbo loans tend to be most sensitive to changes in rates, and that sensitivity has been clearly apparent in the past few weeks with double and even triple digit percentage changes in refinance application volume for jumbo loans," said Mike Fratantoni, MBA's Chief Economist.

Mortgage applications to purchase a home continued their slide last week, down 5 percent from the previous week. Lower rates did nothing to improve purchase volume over the past several weeks, and applications are now running 15 percent below year-ago levels. Signed contracts to buy existing homes were flat in September from August, according to a report Monday from the National Association of Realtors. With loan purchase applications still falling, it is unlikely that sales will improve markedly this month.

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"Purchase applications fell to their lowest level since February of this year, while government purchase applications fell to their lowest level since August 2007," said Mike Fratantoni, chief economist for the MBA.

The sharp drop in government applications, which include loans insured by the Federal Housing Administration (FHA) as well as loans guaranteed by the U.S. Department of Veterans Affairs (VA), is likely due to higher fees and insurance premiums at the FHA. The FHA, which allows borrowers to make down payments as low as 3.5 percent on a home to qualify for a mortgage, has seen its volume fall steadily all year.

"This drop in government loan volume has coincided with a shift in the mix of government mortgages. VA loans accounted for 10.7 percent of total applications last week, exceeding FHA's share of 8.9 percent," Fratantoni said. "This is the second week in a row that VA has topped FHA's share."

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Mortgage rates today are hovering closer to 4 percent, but this could change if there are any unexpected comments that spook the market in today's policy announcement by the Federal Reserve.