A real estate sale sign for a home is seen in front of a house in Arlington, Virginia, November 19, 2020.
Saul Loeb | AFP | Getty Images
The recent sharp rise in interest rates is having a negative effect on the demand for mortgage refinancing, as the number of borrowers who could benefit would fall.
Applications for refinancing a home loan fell by 5% last week compared to the previous week, according to the seasonally adjusted index of the Association of Mortgage Banks. They were also 43% lower compared to the same week a year ago. This is the first year-over-year decline since March 8, 2019. Last year, at this time, mortgage rates fell dramatically as fears of coronavirus hit financial markets. This has led to a significant increase in demand for refinancing, hence this year’s comparison.
The mortgage refinancing rate fell to 64.5% of total applications from 67.5% in the previous week.
The average contract interest rate on 30-year fixed-rate mortgages with compliant loan balances ($ 548,250 or less) increased to 3.26% from 3.23%, with points decreasing to 0.43 from 0.48 (including the initiation fee) for loans with a 20% down payment. Although the weekly movement is not so great, the rates are now increasing by 40 basis points since the beginning of this year.
“Signs of faster economic growth, an improved job market and increased vaccine distribution are increasing higher rates,” said Joel Kan, MBA’s associate vice president of economic and industrial forecasting. “The appreciation of mortgage rates continues to cool the demand for refinancing applications. Activity fell last week for the fourth time in five weeks.”
As rates increase, the group of borrowers eligible for refinancing decreases. About 15 percent of borrowers have fixed mortgages at age 30, with rates lower than 3 percent, and about half of all borrowers have rates below 4 percent, according to Black Knight.
Mortgage applications for the purchase of a house, which are less sensitive to the weekly rate movements, increased by 7% per week, but were only 2% higher than in the same week a year ago. As we now mark the one-year anniversary of the coronavirus pandemic here in the United States, this annual comparison is likely to become significantly negative. Home sales stalled in April and May 2020 during the initial foreclosures, before returning strongly last summer.
“With the spring shopping season at the door, the shopping market has had the strongest presentation in the last four weeks, with gains in both conventional and government applications,” Kan said, noting that loan sizes are -they moderated for the second week in a row – potentially a sign that more first-time buyers are entering the market.
Mortgage rates have been slashed to begin this week and even eased slightly on Tuesday, but could make another decisive move on Wednesday, following a 10-year Treasury auction. Mortgage rates freely follow the yield of that bond.
“This gives the market, in essence, a chance to vote on whether the recent rate hike is enough to reflect progress against the pandemic and progress toward a stronger economy,” wrote Matthew Graham, chief operating officer of Mortgage News Daily.