Mortgage Rates Slip for a Second Week as More Borrowers Turn to Riskier Adjustable Loans

Mortgage rates declined for a second consecutive week, drawing some borrowers back to lenders. Even so, a growing share of applicants chose riskier loans that carry lower rates.

The Mortgage Bankers Association reported that total mortgage application volume rose 3.4% last week from the week before, based on its seasonally adjusted index.

The average contract rate on 30-year fixed-rate mortgages with conforming balances of $832,750 or less slipped to 7.37% from 7.41%. Points rose to 0.76 from 0.75, including the origination fee, for loans with a 20% down payment.

"The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications," said Joel Kan, the MBA's vice president and deputy chief economist, in a release. He added that mortgage rates remain more than a percentage point above where they stood a year ago, and that most homeowners still hold rates far below current market levels.

That gap helps explain why refinancing remains well below last year's pace. Refinance applications grew 3% for the week but were 61% lower than the same week a year earlier. According to the Federal Housing Finance Agency's National Mortgage Database, about half of all borrowers have a mortgage rate under 4%.

Applications for home purchase mortgages gained 4% on the week but stayed 18% below the level of a year ago. Rates have eased over the past few weeks, yet they are still much higher than they were a few months back, and home prices continue to rise. Buyers are also uneasy about the broader economy. Some agents say, anecdotally, that buyers are waiting for the results of the midterm elections.

As borrowers look for ways to save, more are choosing adjustable-rate mortgages. The ARM share of applications increased to 11.3% last week, the highest in more than a year. The average contract rate on 5/1 ARMs fell to 6.41% from 6.46%. These loans are viewed as riskier because they reset to the prevailing market rate when their fixed period ends.

A separate survey from Mortgage News Daily showed rates unchanged so far this week, as little economic data has been released for the bond market to react to. The Federal Reserve is not expected to change its interest rate at its Wednesday meeting, though markets could move on any comments from Fed Chairman Kevin Warsh.