A sharp drop in interest rates prompted more homeowners to refinance their mortgages last week, especially those with large loans, the Mortgage Bankers Association said Wednesday.
Total mortgage application volume increased 9.3 percent on a seasonally adjusted basis from the previous week. Interest rate-dependent refinances were almost entirely behind the gains.
Applications to refinance a home loan rose 16 percent from the previous week, seasonally adjusted, while those to purchase a home rose just 0.2 percent for the week. Purchase applications are still 25 percent higher than one year ago, indicating strengthening in future home sales; while lower rates certainly help homebuyers, they are not an immediate driver of sales. Interest rates were slightly lower one year ago.
"Treasury yields plummeted again last week amid a worsening global financial maelstrom, and mortgage rates dropped as a result," 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 its lowest level since April, 3.91 percent, from 3.97 percent, with points unchanged at 0.41 (including the origination fee) for 80 percent loan-to-value ratio loans, according to the MBA.
Lower rates have the most profound effect on borrowers with larger loans, and that was clear last week. The average loan size on applications was the second highest in the history of the survey at $303,000, with the refinance loan size of $302,000 at its second highest level ever.
"Jumbo borrowers are also benefiting from fierce competition for these loans. The 30-year fixed rate for jumbo loans dropped to its lowest level since April 2013 and is now 15 basis points below the rate for conforming loans," said Fratantoni. "Historically, the rate for conforming loans was about 25 basis points lower than for jumbo loans."
A jumbo loan, by definition, is more than three times the median value of a home nationally, so the home would be worth, at the least, close to a million dollars. This represents barely 4 percent of homes nationally.
This unexpected slide in rates may not be over yet. The average rate on the 30-year fixed mortgage moved lower again Tuesday, even though stocks ended the day in positive territory. Investors usually buy bonds as a safety play when stocks fall; more bond buying pushes bond yields down, and mortgage rates loosely follow those yields. While investors weren't as heavy into the bond market Tuesday, lenders were still working off Monday's bond gains.
"When it comes to adjusting rate sheets to match trading levels in financial markets (which is the core of mortgage rate pricing), lenders have a hard time keeping up with major volatility," said Matthew Graham, chief operating officer of Mortgage News Daily. "As such, rates were able to improve today even though stocks and bonds were mostly sideways."