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Mortgage rates didn't move at all last week, but more borrowers made applications to refinance their home loans, possibly worried that rates will move higher when the Federal Reserve makes its latest policy announcement Wednesday.
Total mortgage application volume decreased 1.1 percent last week from the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Refinance applications, however, increased 1 percent last week. Refinances accounted for 60.7 percent of all applications, up from 58.7 percent the week before.
Mortgage applications to purchase a home fell 3 percent from one week earlier but were 34 percent higher than the same week one year ago.
"Some borrowers may have moved to lock in current rates in advance of the Fed's likely increase this week," said Michael Fratantoni, the association's chief economist.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.14 percent, with points increasing to 0.45 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio loans.
While the Federal Reserve is widely expected to raise the Federal Funds rate on Wednesday for the first time in nearly a decade, that does not necessarily correspond to an increase in mortgage rates. Mortgage rates follow longer-term bond yields, and they could actually go lower in the short term, depending on how investors react to any statements Fed Chair Janet Yellen makes regarding the economy.
Mortgage rates are expected to move higher by the end of 2016, and some argue that is actually healthy for the housing market. The argument is that the low interest rate environment of the past five years has caused home prices to rise too far, too fast.
"With or without Federal Reserve intervention, the income a first-time homebuyer will need to buy today's starter home a year from now will increase. Yet, we estimate the difference to be only $700 more in the likely event that the Fed starts to raise rates," said Mark Fleming, chief economist at First American. "The price of admission into homeownership is going to rise, in part because of the leverage-assisted asset inflation caused by the low rate environment. The time for rock-bottom mortgage rates needs to end and the end of this era will only have a very modest impact on affordability for the first-time homebuyer."
For borrowers already holding an adjustable-rate mortgage and/or a home equity line of credit, higher rates will mean higher monthly payments.
CORRECTION: A earlier version misstated when the Federal Reserve last raised interest rates.