Last week saw mortgage rates hit their highest levels since February, causing a notable shift in the homebuying landscape. This increase has led to a decrease in overall demand, as many potential buyers are exploring riskier loans with reduced rates.

Mortgage Application Trends

According to the Mortgage Bankers Association, total mortgage application volume experienced a significant decline of 8.5% compared to the previous week. The increased average contract interest rate for 30-year fixed-rate mortgages rose to 6.81%, up from 6.61%. This change includes a slight decrease in points—from 0.63 to 0.62—for loans with a 20% down payment.

Buying Activity

Applications for purchasing homes decreased by 5% week-over-week but showed a 13% increase compared to the same period last year. This uptick in annual demand coincides with a larger active inventory, which has grown by 30% compared to last year, hinting at potential for increased market activity.

Market Conditions and Buyer Behavior

Economic uncertainty and fluctuations in mortgage rates have made some buyers more hesitant to commit to purchases. Mike Fratantoni, Senior Vice President and Chief Economist at the MBA, noted, “Economic uncertainty and the volatility in rates is likely to make at least some prospective buyers more hesitant to move forward with a purchase.”

Adjustable-Rate Mortgages (ARMs)

As home prices continue to rise, borrowers are increasingly considering adjustable-rate mortgages (ARMs) to benefit from lower initial payments. Fratantoni observed a surge in ARM applications, noting a full percentage point increase in their share within a single week. Currently, ARMs account for 9.6% of mortgage applications, the highest level since November 2023. On a dollar basis, ARMs constituted nearly 25% of total application volume, particularly among borrowers seeking larger loans.

Refinancing Trends

Applications for refinancing dropped by 12% last week; however, they remained 68% higher than during the same week last year. Notably, last year’s rates were about 32 basis points higher, highlighting ongoing nuances in refinancing activity.

Future Outlook

As the week progresses, mortgage rates have begun to ease slightly, reflecting a calmer market environment compared to the previous week. Yet, experts caution that further volatility in mortgage rates is expected. “Despite the friendly move and the relative calm, this still isn’t an environment where it makes sense to take anything for granted in terms of today’s rates being available beyond the present day,” said Matthew Graham, Chief Operating Officer at Mortgage News Daily.