Mortgage refinance demand has surged to its highest level in nearly two years, driven by a significant drop in interest rates. This increase in refinancing activity comes as homeowners seek to take advantage of the lower rates to reduce their monthly payments and overall interest costs.
The Mortgage Bankers Association (MBA) reported that its Market Composite Index, which measures mortgage application volume, increased by 3.9% on a seasonally adjusted basis from the previous week. On an unadjusted basis, the index was up 30%. The Refinance Index surged by 15% compared to the previous week and was 37% higher than the same week one year ago.
Joel Kan, MBA’s Vice President and Deputy Chief Economist, noted that the decline in mortgage rates was driven by recent signs of cooling inflation and the increased likelihood of Federal Reserve rate cuts later this year. The 30-year fixed rate dropped to 6.87%, the lowest rate since March 2024.
While refinancing activity saw a significant boost, applications for home purchase mortgages declined by 3% after seasonal adjustment, although they were up 22% before adjustment. The Purchase Index was 14% lower than during the same week one year ago. Buyers are facing a lean and pricey market, and with the expectation that rates could drop even more, many are waiting for a better opportunity.
The increase in refinancing activity was largely driven by government-sponsored loans such as Federal Housing Administration (FHA) and Veterans Administration (VA) loans, which typically have lower-than-average rates. The FHA share of total applications increased to 13.5% from 12.5%, and the VA share jumped to 15.2% from 13.7%. The USDA share remained unchanged at 0.4%.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 6.87%, with points dipping to 0.57 from 0.60. The rate for jumbo 30-year fixed-rate mortgages decreased to 7.07% from 7.13%, with points increasing to 0.57 from 0.38. The 30-year fixed-rate mortgages backed by the FHA had a 12-basis point decline to an average rate of 6.75%, with points decreasing to 0.81 from 0.92. The rate for 15-year fixed-rate mortgages dropped to 6.49% from 6.63%, with points decreasing to 0.50 from 0.61. The average contract interest rate for 5/1 adjustable-rate mortgages (ARMs) was 6.33%, up from 6.22%, with points dipping to 0.58 from 0.60.
As the Federal Reserve moves closer to cutting interest rates, mortgage rates are likely to continue decreasing. Market participants are convinced that the Fed will start cutting rates by September, which could further drive refinancing activity. However, convincing borrowers to take new mortgages remains challenging, as purchase applications continue to lag.
Overall, the recent drop in mortgage rates has provided a significant boost to refinancing activity, offering homeowners an opportunity to reduce their monthly payments and overall interest costs.