Mortgage applications: Homeowners get the wrong idea as rates edge higher

After a two-week surge in demand for refinance loans, homeowners have stepped back from the mortgage market, according to a weekly report from a major mortgage industry trade group.

Refinances are down, and so are overall mortgage applications — as mortgage rates move in the opposite direction.

For homeowners who still haven't gotten around to refinancing, the chances of saving big with a refi decrease with every victory the country scores in its battle against COVID-19.

Rising rates rattle homeowners — but not buyers

Mortgage applications declined 4.2% last week, the Mortgage Bankers Association reported on Wednesday. The MBA says it was the biggest drop in applications in seven weeks.

The driving force behind the decrease was a sharp decline in refinance requests, which dipped 7% from the previous week and were 9% lower than during the same week a year ago. Refinances also made up a smaller share of overall mortgage activity last week: 61.4% vs. 63.3% the week before.

Homeowners seem far less willing to refinance their mortgages now that rates have ticked up. But the higher rates don't appear to be scaring away homebuyers.

Applications for the "purchase loans" used by buyers rose 2% last week, the MBA says. That happened while mortgage giant Freddie Mac reported that the average rate on a 30-year fixed-rate mortgage reached 3% for the first time since April 15.

The 3% line seems to be a key threshold for buyers, says Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, D.C.

“The 3% level on the 30-year, fixed mortgage has recently become the main barometer for (homebuyer) decisions. Above 3%, buyers are typically waiting whereas, under 3%, they are pouncing,” Burr says. "Today's consumers are savvy, and they seem to be willing to bet on lower rates."

But that's probably a losing bet.

Today's rates may be as good as it gets

Mortgage rates hit record lows shortly after the start of 2021, then rose as high as an average 3.18% in the Freddie Mac survey, but in recent weeks they dropped back below 3%. Now that they've returned to 3%, they may not slip into "the 2s" again.

Since the past year's ultra-low mortgage rates have been a side effect of pandemic-triggered economic instability, it’s fair to assume that the healthier the U.S. economy becomes, the more mortgage rates will increase.

Assuming that the rebound from COVID-19 is relatively smooth — no more flare-ups in the numbers of new infections or the unemployed — mortgage rates could approach 3.4% by the end of this year, says Danielle Hale, chief economist with Realtor.com.

“We’re at such low levels that 3.4% will be a significant increase," Hale said in an interview. "Homebuyers will notice it when they’re calculating their monthly mortgage payment."

The same goes for homeowners who are still holding back on refinancing. The dip in refinance loan applications suggests owners were given the wrong idea by last week's slight rise in 30-year mortgage rates, from an average 2.4% to an even 3%.

With rates at their current levels, 13 million homeowners still can save an average $283 a month by refinancing, the mortgage data and technology provider Black Knight recently said. But both those numbers will fall if mortgage rates keep climbing.

How to score a low rate — before they're gone

Even though mortgage rates are still historically low, getting the most attractive rate from your lender often means taking a few steps before applying for either a purchase mortgage or a refinance loan.

Shop around to find the lowest mortgage rate available in your area and for a person with your credit score. Studies from Freddie Mac and others have found that comparing at least five mortgage offers is the key to saving thousands over time.

If a refi isn’t possible for you right now, there are other ways of slashing the costs of homeownership. If the time is coming to buy or renew your homeowners insurance, get quotes from multiple insurers to make sure you’re not paying more than you should.

When you apply for a mortgage, lenders will want to see that you’re a responsible borrower with the ability to make your monthly payments. Carrying multiple high-interest debts won’t give them a ton of confidence. Consider rolling all of your debts into a single, lower-interest debt consolidation loan.

You’ll cut the cost of that debt and pay it off sooner — two wise moves most lenders will appreciate.