The mortgage market is currently experiencing a significant shift towards refinancing, with demand heavily skewed in that direction. According to the Mortgage Bankers Association, total mortgage application volume increased by just 1.6% last week, largely driven by refinancing applications. This shift is a result of interest rates declining for the fifth consecutive week.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances dropped to 6.43% from 6.44%. Despite the slight decrease in interest rates, points increased to 0.56 from 0.54 for loans with a 20% down payment. This rate is 78 basis points higher compared to the same week last year.
While applications to refinance a home loan fell by 0.3% for the week, they were 94% higher than a year ago. This significant increase in refinancing activity is largely attributed to borrowers taking advantage of lower rates to reduce their monthly payments. The refinance share of applications averaged almost 46% in August, the highest monthly average since March 2022.
On the other hand, applications for mortgages to purchase a home rose by 3% for the week. However, they are still 4% lower than the same week last year. Despite the slight increase, home sales have been slow throughout the summer due to sky-high home prices. The drop in interest rates has not been sufficient to stimulate homebuying activity.
The increase in mortgage applications for home purchase was led by government loan demand. FHA and VA loans, which offer low or no down payment options, have become popular among lower-income buyers. These loan programs have facilitated access to homeownership for individuals who may not have been able to afford a traditional mortgage.
The current mortgage market is characterized by a strong focus on refinancing, driven by declining interest rates. While refinancing applications have surged, applications for home purchase have been relatively stagnant. The shift towards refinancing reflects borrowers’ efforts to capitalize on lower rates and reduce their monthly payments. Despite the challenges posed by high home prices, government loan programs are providing opportunities for prospective buyers to enter the housing market.