Last week, mortgage rates experienced a third consecutive increase, reaching the highest level since November. Consequently, mortgage application demand suffered a 2.7% decline compared to the previous week, according to the Mortgage Bankers Association’s index. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances also rose to 7.24% from 7.13%, with points increasing slightly to 0.66 from 0.65. This increase in rates has made it more expensive for potential homebuyers to finance their purchases.
Applications for refinancing a home loan, which are particularly sensitive to fluctuations in interest rates, dropped by 6% for the week. However, they remained 3% higher than the same week last year. On the other hand, applications for purchasing a home fell by 1% for the week and were significantly lower, declining by 15%, compared to last year. With the combination of rising home prices and interest rates, prospective buyers are facing a double blow in terms of affordability and purchasing power.
The decline in purchase applications can be attributed to buyers postponing their decisions due to the increasing strain on affordability and limited housing supply. Joel Kan, the deputy chief economist at MBA, highlighted that homebuyers are facing challenges in the current market environment. As affordability becomes more difficult, buyers have to deal with the dilemma of whether to proceed with their home purchase or wait for more favorable conditions.
Shift Towards Adjustable-Rate Mortgages
As a response to the rising interest rates, there has been a shift towards adjustable-rate mortgages (ARMs). This trend was evident in the increase of ARMs in the share of applications, rising to 7.6% last week. While ARMs offer lower initial rates compared to fixed-rate mortgages, they come with the risk of interest rate fluctuations after the initial fixed period. Buyers opting for ARMs need to carefully assess their financial situation and risk tolerance before choosing this type of mortgage.
Although there has been a slight easing in mortgage rates this week, the overall trend has been an increase. However, the lack of significant economic data in recent weeks has limited the influence on mortgage rates. As the housing market continues to adapt to changing conditions, prospective homebuyers need to stay informed and prepared to make informed decisions regarding their mortgage options.
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