Borrowers expecting the Fed to raise interest rates rushed to apply for mortgages last week.
A strong monthly employment report Friday also helped the rise in mortgage applications, which jumped 1.2 percent on a seasonally adjusted basis last week from the previous week, according to the Mortgage Bankers Association.
The Federal Reserve is expected to announce its first interest rate increase in more than nine years when it meets next week.
Refinance volume was entirely behind the gains. Applications to refinance rose 4 percent from the previous week, seasonally adjusted (the previous week included an adjustment for the Thanksgiving holiday).Refinance applications are even up slightly from a year ago, when interest rates were lower.
Applications to purchase a home were basically flat, up 0.04 percent from one week earlier. Purchase volume, however, is 29 percent higher than the same week one year ago, indicating stronger home sales to come. A monthly survey of consumer sentiment by Fannie Mae found a slight improvement in respondents saying now is a good time to buy, despite challenges in affordability and tight supply of homes for sale.
"This year's housing market is poised to be the best since 2007; however, consumers' ability and willingness to purchase a home is likely to remain an issue in many regions going forward until we see consumer confidence in their income growth consistently gain traction," Fannie Mae chief economist Doug Duncan wrote in the report.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.14 percent from 4.12 percent, with points decreasing to 0.43 from 0.50 (including the origination fee) for 80 percent loan-to-value ratio loans.
Standing out in the weekly report is a surge in FHA loan volume. These low down-payment loans, insured by the federal government, are the favorite of first-time buyers, but it was refinances for FHA loans that again drove the volume.
"There was an almost 11 percent increase in FHA refinance volume, as borrowers seek to refinance in advance of higher rates," said Michael Fratantoni, the Mortgage Bankers Association's chief economist.