Mortgage Applications Decline After Rates Jumped to a 1-Year High

Mortgage applications declined last week, after the Federal Reserve issued a split decision on interest rates, according to the Mortgage Bankers Association.

For the week ending on July 31, MBA's Market Composite Index—a measure of total mortgage loan application volume—dropped 2.9% on a seasonally adjusted basis from one week earlier.

The Purchase Index, deemed a leading indicator for home sales, dipped 4% week over week on a seasonally adjusted basis, and was also down 4% from a year earlier. Refinance activity dipped 2% on the week and was down 9% annually.

The downturn came after three members of the Federal Open Market Committee called for an interest rate hike at last week's vote. Although the majority opted to hold rates steady, the growing chorus of concern over inflation rippled through bond markets.

“In the wake of the July FOMC meeting, longer-term rates increased, with mortgage rates reaching their highest level in more than a year,” said Mike Fratantoni, MBA’s chief economist. “Application volume for both refinance and purchase loans declined for the week, and are now running behind last year’s pace, indicating that higher mortgage rates have weakened overall demand.”

MBA estimates that average 30-year fixed mortgage rates hit 6.81% for the week ending July 31, up from 6.76% a week earlier.

Freddie Mac's weekly estimate placed average mortgage rates at 6.66% for the week ending July 30, marking the highest level in one year.

MBA says the refinance share of mortgage activity increased to 39.9% of total applications, up from 39.5% the previous week. The adjustable-rate mortgage share of activity decreased to 7.9% of total applications.

The FHA share of total applications increased to 17.3% from 16.9% the prior week. The VA share of total applications decreased to 12.3% from 12.6% the prior week. The USDA share of total applications increased to 0.5% from 0.4% the prior week.

How mortgage rates are calculated

Mortgage rates are calculated based on various factors in the economy, and the length of your loan and credit score will also factor into the mortgage rate you qualify for.

The 30-year mortgage rate is tied to the yield of the 10-year Treasury note, because most 30-year mortgages are either paid off or refinanced in roughly eight to 11 years.

That makes the duration on the loans roughly comparable, and mortgage lenders use the 10-year Treasury as a benchmark for setting rates, adding on a risk premium.

Long-term yields for Treasury notes are determined by a number of factors, including the supply of and demand for U.S. government debt, and investor expectations for inflation over the life of the bonds.