Mortgage Applications Rise After Hope of Iran Peace Deal Drove Brief Dip in Rates

Mortgage applications to purchase and refinance a home both rose last week, when hopes of a deal to end the Iran war drove a brief dip in mortgage rates, according to the Mortgage Bankers Association.

For the week ending Aug. 7, MBA's Market Composite Index—a measure of total mortgage loan application volume—rose 3.6% on a seasonally adjusted basis from one week earlier.

The Purchase Index, deemed a leading indicator for home sales, rose 3% week over week on a seasonally adjusted basis, but was down 1% from a year earlier. Refinance activity gained 5% on the week and was down 22% annually.

“After five consecutive weeks of increases, mortgage rates declined slightly last week as oil prices dipped briefly on the hopes of a sustained resolution to the war in Iran," says MBA Deputy Chief Economist Joel Kan. "The reprieve in rates supported an increase in both purchase and refinance applications over the week, although the pace of applications has fallen below last year’s pace in recent weeks."

Mortgage rates have closely followed oil prices in recent months, amid concerns that soaring energy costs could drive a sustained increase in inflation. Last week, rumors of a peace deal to reopen the critical Straight of Hormuz helped push crude oil prices lower, and rates followed.

The reprieve was short lived, however. Hopes for a deal feel apart as Tehran pushed for "service fees" to transit the straight, as well as complete cessation of a U.S. blockade on Iranian ports, sanctions lifting, and war reparations.

President Donald Trump on Wednesday insisted the U.S. has "total control" over the Strait of Hormuz, a claim Iran has disputed. Meanwhile cargo vessel traffic through the chokepoint plunged to a one-week low of just eight vessels, according to Reuters. 

MBA estimates that average 30-year fixed mortgage rates dipped to 6.77% for the week ending Aug. 7, down four basis points from the prior week.

Meanwhile Freddie Mac says that rates averaged 6.69% for the week ending Aug. 6, marking the highest level in their reading in more than a year.

MBA says the refinance share of mortgage activity increased to 40.7% of total applications, up from 39.9% the previous week. The adjustable-rate mortgage share of activity was unchanged at 7.9% of total applications.

The FHA share of total applications was also unchanged at 17.3%. The VA share of total applications was unchanged at 12.3%. The USDA share of total applications was unchanged at 0.5%.

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.