Mortgage rates finally broke out of their tight range last week, and borrowers retreated in force.
Total mortgage application volume decreased 7.3 percent on a seasonally adjusted basis from the previous week, according to the Mortgage Bankers Association.
Refinance volume took the biggest hit, since borrowers looking to save on their monthly payments are far more rate sensitive. Applications to refinance a home loan decreased 8 percent last week, seasonally adjusted, from the previous week to the lowest level since June. Refinance volume is still 26 percent higher than the same week one year ago, when mortgage rates were slightly higher.
"Mortgage rates increased to their highest level since June last week as comments by some Fed officials made it appear that the Federal Reserve is closer to raising rates," said Michael Fratantoni, chief economist for the MBA. "The average refi loan size fell to its lowest level in three months as more jumbo borrowers left the market."
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to its highest level since June, 3.70 percent, from 3.67 percent, with points increasing to 0.38 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio loans.
Homebuyers are less sensitive to weekly interest rate moves, but purchase application volume still fell 7 percent from the previous week and was just 3 percent higher than the same week a year ago.
"Higher rates appeared to have a bigger impact on entry-level buyers, as the average purchase loan size increased to its highest level since June," said Fratantoni. Entry-level buyers tend to take out larger mortgages in order to afford their first home.
All eyes will be on interest rates Wednesday afternoon, when the Federal Reserve announces its decision. Most do not expect a rate increase, but the possibility does exist.
"Hike or no hike, the Fed's statement, press conference, and updated economic projections can all cause significant volatility for longer-term rates like mortgages," wrote Matthew Graham, chief operating officer of Mortgage News Daily. "Floating is risky here. Even though today's rates are closer to the highest levels of the past two months, they're still historically close to all-time lows."