Mortgage refinancing fires up as borrowing rates tumble to lowest in more than a year

Homeowners rushed to refinance their mortgages after a spark in recession fears contributed to a key rate falling to a 15-month low, according to figures released Wednesday.

The Mortgage Bankers Association’s (MBA) refinance index shot up 16% in the week ending Aug. 2 from the previous week, and was 59% higher than the same week one year ago. The move came as the 30-year fixed rate – the dominant rate among U.S. homeowners – fell to 6.55%, the lowest level since May 2023.

The “doveish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected,” drove down the closely watched borrowing rate, Joel Kan, the MBA’s deputy chief economist, said in its weekly survey report.

While lower rates (US10Y) provide relief, just 24% of U.S. homeowners have mortgages with rates of 5% or more, according to the ICE Mortgage Monitor report for July.

“As a result of lower rates, refinance applications increased across all loan types, particularly for VA loans,” and were nearly 60% higher than this time last year, and at the highest in two years, Kan said.

Prospective homeowners also sought to take advantage of falling rates, with total mortgage application volume climbing 6.9% from a week earlier, the MBA said. But purchase activity “only saw small gains,” with the purchase index up 1%, the trade group said.

“For-sale inventory is beginning to increase gradually in some parts of the country and homebuyers might be biding their time to enter the market given the prospect of lower rates,” Kan said.

Morgan Stanley (MS) in a Tuesday report about U.S. consumers said housing affordability remains a challenge.

“The effective mortgage rate remains at an all-time spread from prevailing rates. But an improvement in inventory should help alleviate affordability pressures,” MS economists led by Sarah Wolfe said.