Refinances rebound thanks to falling interest rates

Mortgage volumes picked up post Thanksgiving, with a decline in interest rates leading to increased refinance activity, according to the Mortgage Bankers Association.

The MBA’s Market Composite Index, a measure of loan activity based on a survey of association members, increased 2% week over week on a seasonally adjusted basis for the period ending Dec. 3. The prior week included an adjustment for the Thanksgiving holiday. Unadjusted volumes came in 45% higher, while the seasonally adjusted index was 27.3% below its level in the same period in 2020.

The Refinance Index registered an increase of 9% over the previous week, but declined 37% compared to the same seven-day period one year ago.

“Mortgage rates declined for the first time in a month, prompting a pickup in refinancing, with government refinances increasing more than 20% over the week,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a press release.

“Borrowers are continuing to act on these opportunities, but if rates trend higher as MBA is forecasting, the window of opportunity to refinance will continue to get smaller,” Kan added.

While refinances surged, purchases headed the other direction for the first time in over a month. The seasonally adjusted Purchase Index fell 5% from a week earlier, while on an unadjusted basis, volume increased by 28%. The unadjusted index was 8% under its mark during the same time frame a year ago. Despite the decrease, Kan said that numbers were still close to their highest since March, “a positive sign as the year comes to an end.”

“Purchase activity continues to be constrained by a lack of inventory, combined with rapid rates of home-price appreciation and mortgage rates higher than in 2020,” he said.

In tandem with the uptick in applications, refinances also accounted for a larger percentage of mortgage volume relative to total activity, increasing its share to 63.9% from 59.4% a week earlier. But the share of adjustable-rate mortgages dropped to 3% from 3.6%.

A 7-basis-point drop in the average interest rate for Federal Housing Administration-sponsored loans resulted in a larger share of government-backed activity compared to the prior seven days. Applications backed by the FHA increased their share to 9.9% from 8.9%, while mortgages taken through the Department of Veterans Affairs grew to 10.7% from 10%. The share of U.S. Department of Agriculture-sponsored loans remained the same week over week at 0.5%.

The surge in government lending helped bring down average loan amounts for both refinances and purchases. The mean amount of refinance applications decreased by 3.2%, coming in at $298,300 compared with $308,100 in the previous weekly period. After reaching its highest mark since February seven days earlier, the average purchase loan size retreated below $400,000 for the first time in over two months, dropping 4.2% to $397,200 from $414,700 the prior week. The mean size of all new applications in the reporting period came in at $334,000, down from $351,400, a weekly decline of 5%.

Contract interest rates fell for the first time in weeks in a majority of major categories, including for the 30-year conforming fixed-rate mortgage with balances of $548,250 or less, whose average dropped to 3.3% from 3.31% the prior week.

But the average rate of the 30-year jumbo fixed rate mortgages with balances greater than $548,250 posted a 6-basis-point rise to 3.33% from 3.27%

After a 15-basis-point jump seven days earlier, the contract interest rate for 30-year loans backed by the Federal Housing Administration also fell to 3.35% from 3.42%

The 15-year fixed-rate mortgage average dropped for the first time in four weeks, down to 2.62% from 2.63%.

The 5/1 adjustable-rate mortgage rate took another large swing, rising 50 basis points to 2.98%, after it had fallen by an even larger margin to 2.48% in the prior reporting period.