Mortgage refinance demand plunges 14%, as interest rates spike higher

A sharp increase in mortgage interest rates is taking its toll on loan demand, especially refinances. Total mortgage application volume fell 8.1% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.50% from 4.27%, with points rising to 0.59 from 0.54 (including the origination fee) for loans with a 20% down payment.

“The jump in rates comes as markets moved to price in a much faster pace of rate hikes, as well as expectations of fewer MBS purchases from the Federal Reserve,” said Mike Fratantoni, the MBA’s chief economist. “MBA’s new March forecast expects mortgage rates to continue to trend higher through the course of 2022.”

As a result, applications to refinance a home loan, which are highly sensitive to weekly rate moves, fell 14% from the previous week and were 54% lower than the same week one year ago. The refinance share of mortgage activity decreased to 44.8% of total applications from 48.4% the previous week.

“The number of high-quality refi candidates was already down more than 75% through last week – these latest jumps will likely cut that population even further,” said Andy Walden, vice president of enterprise research at Black Knight. “But, while we are now seeing declines in overall lending activity, cash-out lock volumes continue to hold stronger than rate/term refis against rising rates. This will be an important market segment for lenders, particularly given the record $10 trillion in tappable equity available being padded even further by the still red-hot housing market.”

Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 2% for the week and were 12% lower than the same week one year ago. Economists are starting to revise their home sales forecasts lower, due to rising rates. The housing market is already expensive, as a supply-demand imbalance puts upward pressure on prices. Rising rates are weakening affordability even further.

While overall purchase application volume was down slightly, there was a larger drop in FHA and VA loan demand. These loans are popular with lower-income homebuyers.

“First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” added Fratantoni.