A home’s real estate sale sign is seen outside a home in Arlington, Virginia on November 19, 2020.

Saul Loeb | AFP | Getty Images

The recent sharp rise in interest rates is now weighing on demand for mortgage refinancing as the number of borrowers who could benefit from it diminishes.

According to the Mortgage Bankers Association seasonally adjusted index, home loan refinance requests were down 5% last week compared to the previous week. They were also 43% lower than the same week a year ago. This is the first decrease since March 8, 2019 compared to the previous year. Last year mortgage rates fell dramatically at this point as coronavirus fears hit financial markets. This led to a sharp increase in refinancing demand, hence this year’s comparison.

The refinancing share of mortgage activity decreased from 67.5% in the previous week to 64.5% of the total applications.

The average contract rate on 30-year fixed rate mortgages with compliant loan balances ($ 548,250 or less) increased from 3.23% to 3.26%, with credit points decreasing 20% ​​from 0.48 (including the origination fee) payment decreased to .43. While the weekly move isn’t that big, rates have risen 40 basis points since the start of the year.

“Signs of faster economic growth, an improving labor market and increased vaccine distribution are leading to higher rates,” said Joel Kan, vice president of economic and industrial forecasting for MBA. “The rise in mortgage rates continues to cool demand for refinancing requests. Activity declined last week for the fourth time in five weeks.”

As interest rates rise, the pool of borrowers who can benefit from refinancing shrinks. About 15% of borrowers have 30-year fixed first mortgages with interest rates less than 3%, and about half of all borrowers have interest rates below 4%, according to Black Knight.

Home purchase mortgage applications, which are less sensitive to weekly interest rate changes, rose 7% over the week but were only 2% higher than the same week a year ago. Home sales stalled during the initial lockdowns in April and May 2020 before rebounding sharply last summer.

“With the spring buying season on the doorstep, the buying market was strongest in four weeks, with increases in both conventional and government applications,” said Kan, noting credit sizes for the second week in a row weakening – possibly a sign that first-time buyers are entering the market.

Mortgage rates flattened earlier this week and even fell slightly on Tuesday, but they could take another crucial step on Wednesday after the 10-year Treasury auction. The mortgage rates loosely follow the yield on that bond.

“This essentially gives the market a chance to vote on whether the recent rate hike is enough to reflect progress against the pandemic and progress toward a stronger economy,” wrote Matthew Graham, chief operating officer of Mortgage News Daily.