Rising mortgage rates appear to be the new normal, and the market for home loans is still adjusting.
Total mortgage application volume fell 4 percent on a seasonally adjusted basis last week from the previous week, according to the Mortgage Bankers Association. While rates didn't rise much during the week, the new range is clearly pricing out some buyers and more refinancers.
Applications to refinance a home loan fell 4 percent, seasonally adjusted, and average refinance loan sizes declined. Given how low mortgage rates have been for so long, today's refinancers are highly rate-sensitive; even the slightest move higher in rates keeps more borrowers from being able to benefit from a refinance. Refinance applications are 12 percent lower than the same week one year ago.
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 October 2014, 4.28 percent, from 4.27 percent, with points decreasing to 0.36 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio loans. The average rate for larger, jumbo loans, rose even higher.
"While jumbo 30-year fixed rates have been a bit slower to increase compared to overall fixed rate mortgage rates in recent weeks, they increased 7 basis points last week to an average of 4.29 percent. At the same time, the average five-year ARM rate declined by 11 basis points to 3.28 percent, which may provide an alternative outlet for jumbo borrowers," said Lynn Fisher, MBA vice president of research and economics.
Mortgage applications to purchase a home, which are less rate-sensitive, still lost ground, falling 3 percent for the week. Purchase applications are now just 2 percent higher than the same week one year ago. Some argue that higher rates are taking their toll, but it is likely that higher home prices and short supply are weighing on homebuyers more than interest rates. There is also the fear that rates will move higher. The Federal Reserve is widely expected to raise its benchmark interest rate on Wednesday. While mortgage rates do not follow the Fed exactly, they are guided by Fed policy.
"Mortgage rates will more readily respond to shifts in the outlook, and [Wednesday's Fed] meeting can inform that outlook via the Fed's economic projections as well as [Fed Chair Janet] Yellen's press conference," said Matthew Graham, chief operating officer of Mortgage News Daily.