The Impact of Decreased Mortgage Rates on Refinancing Applications

According to the Mortgage Bankers Association’s (MBA) weekly survey of lenders, the dip in mortgage rates last week failed to result in more homebuyer applications. However, it did generate increased interest in refinancing from historically low levels.

The MBA’s Weekly Mortgage Applications Survey indicated that purchase loan applications decreased by 1 percent last week when adjusting for seasonal factors, such as the July 4 holiday. Additionally, purchase loan applications were down 21 percent compared to the previous year.

On the other hand, refinance applications were up 7 percent week over week, with lenders receiving 32 percent more refi requests than during the same period in the previous year.

MBA Deputy Chief Economist Joel Kan stated, “Mortgage rates declined last week, as markets responded positively to incoming data showing that U.S. inflation continues to cool.” However, despite lower rates, home purchase activity remains subdued due to limited housing supply and rates that are still significantly higher than a year ago.

Data from Black Knight’s Optimal Blue Mortgage Market Indices, which track daily rate lock data, shows that rates on 30-year fixed-rate conforming mortgages reached a 2023 high of 7.02 percent on July 7. Subsequently, rates dipped below 7 percent following the news that inflation dropped steeply in June to its lowest level in over two years.

Looking ahead, forecasters at Fannie Mae warn that the current lack of inventory driven by the mortgage lock-in effect may persist if the Federal Reserve maintains a ‘higher-for-longer’ rate strategy to combat inflation. Fannie Mae predicts gradual rate declines on 30-year fixed-rate mortgages, with rates not expected to fall below 6 percent until the final three months of next year. However, economists at the Mortgage Bankers Association anticipate sub-six percent mortgage rates by the final quarter of this year.

Consumer surveys conducted by senior research analyst Maegan Sherlock of John Burns Research and Consulting reveal that the “magic number” for mortgage rates is 5.5 percent. Most consumers indicate a willingness to purchase homes if rates were to fall below that threshold.

The CME Fed Watch tool, designed to monitor interest rate traders’ bets, indicates a potential reversal of course by the Fed in the upcoming year, with rates potentially being reduced by up to a full percentage point.

During the week ending July 14, the Mortgage Bankers Association (MBA) reported the following average rates for various types of loans:

• 30-year fixed-rate conforming mortgages (loan balances of $726,200 or less) averaged a rate of 6.87 percent, down from 7.07 percent the previous week. The points decreased to 0.66 from 0.74 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, resulting in a decrease in the effective rate.
• Rates for 30-year fixed-rate jumbo mortgages (loan balances greater than $726,200) averaged 6.89 percent, down from 7.04 percent the week before. Although the points increased to 0.64 from 0.59 (including the origination fee) for 80 percent LTV loans, the effective rate decreased.
• 30-year fixed-rate FHA mortgages averaged a rate of 6.77 percent, down from 6.86 percent the previous week. The points decreased to 1.12 from 1.23 (including the origination fee) for 80 percent LTV loans, resulting in a decrease in the effective rate.
• Rates for 15-year fixed-rate mortgages, commonly preferred by refinancing borrowers, averaged 6.36 percent, down from 6.42 percent the week before. The points decreased to 0.72 from 1.22 (including the origination fee) for 80 percent LTV loans, leading to a decrease in the effective rate.
• 5/1 adjustable-rate mortgage (ARM) loans averaged 6.27 percent, slightly up from 6.24 percent the previous week. However, the points decreased to 0.91 from 1.42 (including the origination fee) for 80 percent LTV loans, resulting in a decrease in the effective rate.