Mortgage applications drop as interest rates rise

Posted Feb 20th 2008 4:32PM by Lita Epstein

The short-term drop in mortgage interest rates just before the emergency Fed rate cut in January of .075% and before its 0.5% cut at the regularly scheduled FOMC meeting at the end of January started a mortgage refinance party. But that party ended pretty quickly because mortgage interest rates are back on the raise. So it's not surprising that mortgage applications dropped like a stone by 22.6% to 822.8 last week. That level was last seen on Jan. 4 before the mortgage rate cutting party began in anticipation of the Fed rate cuts.

Many are sitting on the sidelines waiting to see if the Fed will cut another 0.5%, as analysts expect at its next meeting March 20 and 21. Since inflation appears to be heating up, that rate cut may not be a lock. Upward prices on food, energy and health continue to wield considerable inflationary pressures.

Since home sales continue at a snail's pace most new mortgage applications are for refinances, so these applications drop off dramatically as interest rates rise. Borrowing cost for 30-year fixed-rate mortgages were up about 0.37% from the previous week and averaged 6.09%, which was slightly below last year's level of 6.19%. Mortgage rates usually go up as the 10-year U.S. Treasury notes, which hit its highest yield on Tuesday at 3.915% since early January. Fixed 15-year mortgage rates averaged 5.55% up from 5.18% last week. Rates on one-year ARMs were unchanged at 5.72%. Now is definitely not the time to even think about an ARM. If you are taking a loan lock in that fixed rate.

But mortgage applications are much higher than they were last year at this time - up 35.6%. Tight lending standards and limited credit availability are the two key factors keeping the mortgage applications down. But, many people are also playing the waiting game before refinancing hoping the next Fed rate cut will bring the rates back down.

Lita Epstein has written 20 books including the "Complete Idiot's Guide to Improving Your Credit Score."

Tags: 30 year fixed mortgage, 30YearFixedMortgage, ARMs, mortgages

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Reader Comments (Page 1 of 1)

2-20-2008 @ 8:36PM

sara dodson said...

It seems to me that it would make a lot of sense to lower interest rates significantly making it more affordable to buy a house and start getting rid of the bulk of homes on the market. This obviously would need to be done in combination with mortgage companies being less rigid with the individuals with good to excellent credit.

2-21-2008 @ 11:22AM

Jimmy said...

LONG TERM MORTGAGE RATES HAVE NOTHING TO DO WITH THE FED FUNDS RATE.

I repeat:

LONG TERM MORTGAGE RATES HAVE NOTHING TO DO WITH THE FED FUNDS RATE.

They are dictated by the sale of mortgage bonds, and to get an indication of where those rates are going you are better follow the 10 year treasuries because mortgage bonds will mirror their performance for the most part. What has happened to the yield on the treasuries in the past two weeks?

There's your answer to the rising rate question. It has nothing to do with the Fed, in fact the rates often move inversely to each other.

2-21-2008 @ 11:31AM

Lita Epstein said...

Jimmy,

If you need help understanding the connection between mortgage rates and Fed rate cuts, check out this story at BankRate.com:

http://www.bankrate.com/brm/story_content.asp?story_uid=24336&prodtype=mtg

Lita

2-22-2008 @ 3:09PM

Connie said...

i would have loved to lock the the rate I had last week @ 5.75. but these banks that own the houses are taking their sweet time to respond to buyers and in our case, it has been 2 weeks since we made our offer (we were told to expect 30-45 days for a response, the property is a short sale) and in that 2 weeks out rate has jumped to 6.125. i am afraid that this delayed response is going to force our interest rate up to where we can't get this house. we are being told that our rate can't be locked in until we have a signed purchase agreement, anybody have any advise? we are 1st time buyers with an FHA preapproval. we are also in a price range and location where to afford to buy in our target area, all that is available are the short sales & forclosures, so even if we withdaraw our offer and go with another property, we are still going to be waiting as interest rates climb. we don't ecpect a purchase agreement for at least another week or 2