Mortgage conditions usually change somewhat from week-to-week, but they have been especially interesting to watch in May, because rising mortgage rates have started to affect mortgage application volume. Looking at the way things are changing can help you better understand the mortgage market, and make your mortgage plans accordingly.
Mortgage Rates Up, Mortgage Applications Down
Not surprisingly, mortgage application volume has slipped as interest rates have risen. According to the Mortgage Bankers Association (MBA), in mid-May application volume fell by 9.8 percent in one week as 30-year mortgage rates rose by 11 basis points. A closer look at some of the details behind these numbers reveals some of the dynamics of today’s mortgage market. The following are five key points about that market, based on recent movements in rates, changes in mortgage application volume, and differences between various loan types (i.e., FHA loans vs. other mortgages, 15-year vs. 30-year loans, etc.):
1. Refinancing volume will be most sensitive to interest rate increases. According to the MBA, for the week ending May 17th refinancing application volume fell by 12 percent, while new purchase applications dropped just 4 percent. Get used to that pattern if rates continue to rise. There will always be a number of timing factors unrelated to rates that determine when a person is ready to buy a house, but refinancing is primarily a question of comparing rates. The higher current rates go, the fewer people will find new rates more attractive than their existing rate. The takeaway here is that if you’ve been thinking about refinancing, you need to step up your sense of urgency before the opportunity is gone.
2. 15-year mortgages are worth a look… While 30-year fixed-rate mortgage rates rose to 3.78 percent as of May 17, 15-year mortgage rates were still below 3.0 percent. In fact, 30-year mortgage rates increased by 11 basis points in one week while 15-year mortgage rates rose by just 8 basis points, so the rate advantage of a shorter mortgage grew as interest rates rose.
3. …but adjustable-rate mortgages are not. Adjustable-rate mortgages (ARMs) represented just five percent of recent mortgage application volume, and there is a reason they are out of favor. With mortgage rates near their historical lows, there is much more room for rates to rise than to fall. That increases the possibility that an ARM would be a losing proposition for borrowers. Also, at 2.60 percent, 5/1 ARMs have just a 36 basis point advantage over 15-year fixed rates, which is just not enough to compensate you for the risk of rising rates.
4. Lenders are still very skittish about risk. Speaking of risk, FHA loan rates are 25 basis points cheaper than non-FHA loan rates. That differential represents the extra compensation lenders are demanding for loans that aren’t backed by the US government, even with a 20 percent down payment.
5. HARP is still viable. The government’s Home Affordable Refinance Program (HARP) is due to expire at the end of this year, but in the meantime it is attracting a steady stream of home owners. HARP loans represent nearly a third of all refinancing applications. This is a program that lets home owners refinance in certain circumstances even if they owe more than their homes are worth. If you think you’ve been shut out from refinancing because the value of your home has dropped, look into HARP while the program is still in effect and before interest rates rise any further.
What’s not immediately apparent from the short-term mortgage numbers is what impact rising interest rates will have on home prices. The Standard and Poors/Case-Shiller Home Price Indices recently posted double-digit year-over year gains for housing prices. Will this recent improvement in prices survive a rise in mortgage rates? That question is another reminder of why you should not miss out on an opportunity to refinance if you can do so now. Otherwise, you not only risk missing the interest rate opportunity, but you also face the possibility that another dip in home prices will limit your refinancing options.