Mortgage Applications Fall (Again) Before Rate Spike

May 16, 2018 — 2:57 PM EDT

Borrowers have missed the boat on low mortgage rates and are showing more hesitation to apply for mortgages. Total mortgage applications fell 2.7% last week, according to the Mortgage Bankers Association's (MBA) . A year ago, mortgage application volume was 4.5% higher. However, rates were also significantly lower, according to a CNBC report.

Refinance applications pushed total applications down, falling 4% to the lowest level since August 2008, the MBA said. Although mortgage rates dipped slightly last week, it wasn't enough to convince homeowners to refinance their mortgages.

Any reprieve borrowers could have felt from last week's mortgage-rate dip was short lived. Mortgage rates, which closely follow movement in the 10-year Treasury bond yield, surged to seven-year highs on Tuesday after investors rushed to sell off government bonds, according to Mortgage News Daily. The 10-year Treasury yield spiked to 3.070%, the highest level since July 2011 and the largest single-day increase since March 1, before climbing even higher to 3.090% on Tuesday, according to The Wall Street Journal Market Data Center.

Chart showing the refinance index and the 30-year fixed mortgage rate

Source: MBA

Meanwhile, new mortgage applications tumbled 2% last week. Housing experts have pointed to expected rate climbs, high home prices and low inventory as the culprits behind slower purchase activity.

Chart showing the purchase mortgage applications index

Source: MBA

The average interest rate for 30-year, fixed-rate mortgages with conforming balances ($453,100 or less) dipped minimally to 4.77% from 4.78%, with points (including the loan origination fee) holding steady at 0.50 for 80% loan-to-value (LTV) ratio loans.

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As 30-year interest rates continue to surge (as expected), more borrowers are turning to adjustable-rate mortgages to snag a lower rate. ARMs have a fixed introductory period, usually five or seven years, before resetting to a variable rate for the remainder of the loan term. The average interest rate for 5/1 ARMs spiked to a survey-high 4.09% last week from 4.00% the previous week, with points increasing to 0.56 from 0.43 (including the origination fee) for 80% LTV loans. Despite the surge in ARM rates, they are still much lower than 30-year fixed rates.

ARMs are generally ideal for homebuyers who don't plan to stay in their home beyond the initial fixed-rate period of the ARM. Choosing an ARM can save borrowers a significant amount of money on interest payments in the initial years of homeownership.