Mortgage Applications Climb as Home Loan Rates Ease

Mortgage applications rose 3.4% from the previous week as home loan interest rates fell for a second straight week, offering some relief to buyers.

For the week ending Oct. 23, the Mortgage Bankers Association said its Market Composite Index, which tracks overall mortgage application volume, increased 3% on a seasonally adjusted basis from the prior week.

The Purchase Index, which measures applications for loans to buy single-family homes, advanced 4% after seasonal adjustment, although purchase applications were still 18% lower than a year earlier.

According to MBA data, the average contract interest rate for 30-year fixed mortgages with conforming loan balances was 7.37%, down slightly from 7.41% the week before.

A separate Freddie Mac survey showed mortgage rates falling to 7.32% from 7.4% in the prior week.

“Mortgage rates declined for the second week in a row, with the 30-year fixed rate decreasing to 7.37%, the lowest in three weeks. The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications,” said Joel Kan, CMB, MBA's vice president and deputy chief economist.

Even with the recent drop, mortgage rates remain more than a percentage point above the same period a year earlier, and many homeowners still hold loans at rates well below current market levels, he said.

That has encouraged more borrowers to turn to adjustable-rate mortgages. ARM rates are nearly a full percentage point below the 30-year fixed rate, and the share of ARM applications rose from 10.5% to 11.3% week over week, the highest level in more than a year.

The share of FHA loan applications slipped to 16.6% from 16.3% the week before. VA loans accounted for 11% of total applications, down from 11.5%, while the USDA share held steady at 0.5%.

The refinance share of mortgage activity edged down to 38.9% from 39% the previous week. Although the refinance index climbed 3% from the prior week, it remained 61% below the same period a year ago, as many homeowners continue to stay in place with lower existing rates.

After raising rates in September, the Federal Reserve is meeting again to discuss interest-rate policy. It is widely expected that Chairman Kevin Warsh and other policymakers will keep rates unchanged ahead of upcoming midterm elections.

How mortgage rates are determined

Mortgage rates are shaped by a range of economic factors, and the loan term and your credit score also influence the rate you may receive.

The 30-year mortgage rate is closely linked to the yield on the 10-year Treasury note, since most 30-year mortgages are either paid off or refinanced in about eight to 11 years.

Because those time frames are broadly comparable, lenders often use the 10-year Treasury as a benchmark when setting mortgage rates, then add a risk premium.

Long-term Treasury yields are influenced by several forces, including supply and demand for U.S. government debt and investor expectations for inflation over the life of the bonds.