Mortgage rates eased for a second week, yet more borrowers turned to riskier loans for savings

Mortgage rates slipped for a second consecutive week, drawing more borrowers back to brokers. Even so, a larger share of applicants pursued riskier loans in exchange for lower rates.

Total mortgage application volume increased 3.4% from the prior week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract rate on 30-year fixed mortgages with conforming loan balances of $832,750 or less fell to 7.37% from 7.41%. Points, including the origination fee, rose to 0.76 from 0.75 for borrowers making a 20% down payment.

“The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications,” said Joel Kan, the MBA’s vice president and deputy chief economist, in a release. “Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates.”

That helps explain why refinancing remains far below last year’s pace. Refinance applications rose 3% for the week but were 61% lower than in the same week a year earlier. Roughly half of all borrowers now have a mortgage rate below 4%, according to data from the Federal Housing Finance Agency’s National Mortgage Database.

Applications for loans to buy homes climbed 4% for the week, though they were still 18% below the level seen in the same week a year ago. Mortgage rates have eased somewhat in recent weeks, but they remain far above where they stood a few months earlier, while home prices continue to rise. Prospective buyers are also concerned about the broader economy, and some agents say buyers are waiting to see the outcome of the midterm elections.

As borrowers look for cheaper options, more are choosing adjustable-rate mortgages, or ARMs. The ARM share of applications rose to 11.3% last week, the highest in more than a year. The average contract rate for 5/1 ARMs declined to 6.41% from 6.46%. ARMs are seen as riskier because they reset to whatever the market rate is at the end of the fixed period.

Mortgage rates were unchanged at the start of the week, according to a separate survey from Mortgage News Daily. With little economic data for bond markets to react to, borrowing costs held steady. The Federal Reserve is not expected to announce a change in interest rates at its upcoming meeting, though markets could still move on any remarks from Fed Chair Kevin Warsh.