As interest rates rise, demand for mortgage refinancing falls by 14%.

The demand for loans, particularly refinances, is being impacted by a dramatic spike in mortgage interest rates.

According to the Mortgage Bankers Association's seasonally adjusted index, total mortgage application volume declined by 8.1% last week compared to the prior week.

For loans with a 20% down payment, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) rose to 4.50 percent from 4.27 percent, with points climbing to 0.59 from 0.54 (including the origination fee).

Mike Fratantoni who is the MBA’s chief economist said, “The jump in rates comes as markets moved to price in a much faster pace of rate hikes, as well as expectations of fewer MBS purchases from the Federal Reserve.”

Also adding that “MBA’s new March forecast expects mortgage rates to continue to trend higher through the course of 2022.”

In response to this, refinancing applications, which are particularly sensitive to weekly rate changes, decreased 14% from the previous week and were 54% lower than the same week a year ago. The refinance share of overall activity in mortgage fell to 44.8 percent from 48.4 percent the previous week.

The vice president of enterprise research at Black Knight, Andy Walden said “The number of high-quality refi candidates was already down more than 75% through last week – these latest jumps will likely cut that population even further”. 

“But, while we are now seeing declines in overall lending activity, cash-out lock volumes continue to hold stronger than rate/term refis against rising rates. This will be an important market segment for lenders, particularly given the record $10 trillion in tappable equity available being padded even further by the still red-hot housing market.” He added.

Mortgage applications for house purchases, which are less affected by weekly rate changes, decreased 2% this week and were 12% lower than the same week a year ago. Due to rising interest rates, economists are beginning to modify their home sales projections downward.

Because of a supply-demand imbalance, the housing market is already costly. Affordability is being affected even more by rising rates.

As overall purchase application volume decreased slightly, demand for FHA and VA loans decreased significantly. Low-income homebuyers choose these types of loans.

Fratantoni said, “First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates.”