Mortgage Applications Soar Despite Increase in Home Loan Interest Rates

Approximately 40 percent of all U.S. mortgages originated in either 2020 or 2021.

PUBLISHED FEB 4, 2024

Cover Image Source: | Pexels | Photo by Mikhail Nilov

The real estate sector is undergoing significant transformations, attracting investors seeking potential opportunities. Presently, a growing number of individuals prefer to invest in homes and farmhouses over rental properties. This shift can be attributed to changing priorities, lifestyle choices, and current needs. The escalating interest and demand from prospective homebuyers have led to a surge in mortgage applications, despite a marginal upsurge in home loan interest rates.

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Mortgage rates experienced a slight uptick last week; however, this did not stop homebuyers, who came back post-holiday. According to the Mortgage Bankers Association's seasonally adjusted index, mortgage applications for home purchases increased by 8% compared to the previous week. Despite this rise, demand remained 18% below the same week in the previous year when rates were lower. The average contract interest rate for 30-year fixed-rate mortgages rose from 6.75% to 6.78% for loans with a 20% down payment.

Joel Kan, an economist at the MBA, noted, "Mortgage rates increased slightly last week, but there continues to be an upward trend in purchase activity. Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season." The significant increase in purchase activity despite the uptick in mortgage rates indicates a strong demand in the housing market, possibly influenced by factors such as economic conditions and seasonal trends.

Photo illustration miniature houses next to American Dollar notes | Getty Images | Photo by Christopher Furlong — Image Source: Getty Images | Photo by Christopher Furlong

In contrast, applications for refinancing a home loan decreased by 7% for the week and were 8% lower than the same period a year ago. Higher current rates compared to the previous year, and a significant increase from two years ago when refinancing was more prevalent, provide little motivation for most borrowers. Mortgage rates, however, saw a further increase at the beginning of this week, reaching an average of 6.92% for the 30-year fixed.

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By the end of the previous year, 90 percent of new home loans in the United States were accounted for by 30-year fixed-rate mortgages, as reported by ICE Mortgage Technology. Approximately 40 percent of all U.S. mortgages originated in either 2020 or 2021, a trend attributed to the favorable low-interest rates during the pandemic, allowing several Americans to refinance their home loans. In October 2023, U.S. monthly home prices continued to rise compared to the previous year, and shelter expenses contributed to one-third of the consumer price change in November.

Should the Federal Reserve initiate rate cuts this year, as anticipated by policymakers and market participants, mortgage rates are expected to adjust accordingly, potentially unlocking pent-up housing demand. However, a sudden surge resulting from swift rate cuts could counteract any improvements in housing supply, leading to a rebound in prices.