Homebuyers Pick Adjustable Loans as Mortgage Rates Drop

Mortgage rates fell for the second straight week, prompting a modest increase in loan applications across the country.

The Mortgage Bankers Association reported that total application volume climbed 3.4% week over week. The average rate on a 30-year fixed mortgage with a conforming balance of $832,750 or less dropped to 7.37% from 7.41%. Points on these loans rose slightly to 0.76. Joel Kan, the association's vice president and deputy chief economist, said the rate decline gave borrowers some relief. He noted that conventional applications saw a particular rebound.

Despite the weekly drop, rates remain more than one percentage point higher than they were a year ago. This gap keeps refinancing activity low. Refinance applications rose 3% for the week but lagged the same period last year by 61%. The Federal Housing Finance Agency data shows that roughly half of current borrowers pay a rate under 4%. Most homeowners are not in a position to refinance at today's market prices.

Purchase applications gained 4% week over week, though they remained 18% below last year's levels. Home prices continue to climb, and buyers express uncertainty about the economy. Some real estate agents say clients are pausing their search until they see the results of the midterm elections. To save money, more applicants are turning to adjustable-rate mortgages.

The share of applications for adjustable-rate loans hit 11.3% last week, the highest level in over a year. The average rate on a 5/1 ARM fell to 6.41% from 6.46%. These loans carry a fixed rate for five years before adjusting to market rates, which many lenders view as riskier than fixed options.

Mortgage News Daily reported that rates stayed flat so far this week due to a lack of new economic data. The Federal Reserve is scheduled to meet on Wednesday. Markets may react to comments from Fed Chairman Kevin Warsh, though a change in interest rates is not expected.