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Weekly Mortgage Demand Remains Flat Despite Lowest Rates Since April 2023

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Mortgage rates fell for the fourth consecutive week, hitting their lowest level since April 2023, but the impact on mortgage demand was minimal. Total mortgage application volume increased by just 0.5% from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances dropped to 6.44%, down from 6.50%. Points also decreased to 0.54 from 0.60 for loans with a 20% down payment. Despite this decline, the demand to refinance decreased by 0.1% from the previous week, although it was 85% higher than the same week last year. Most existing borrowers hold mortgages with rates below 6%, making refinancing less attractive unless substantial savings can be achieved.

Applications for home purchases rose by 1% for the week but were still 9% lower compared to the same week last year. Joel Kan, MBA’s vice president and deputy chief economist, noted that prospective homebuyers are showing patience, waiting for further rate decreases and a rise in for-sale inventory.

Mortgage rates have been stable at the start of this week, with no significant economic data expected to impact them until the monthly employment report is released next week.

When It Makes Sense to Tap Into Home Equity: A Smart Guide for Homeowners

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Homeowners in the U.S. currently hold a staggering $17 trillion in home equity, with the average homeowner gaining $28,000 in equity over the past year, according to CoreLogic. While it might be tempting to access this equity, experts caution that it’s important to consider when and how to tap into these funds.

Greg McBride, chief financial analyst at Bankrate, emphasizes that home equity is not a perishable asset. “It’s not like bread,” he says. “It won’t go stale if it just sits there.” For many homeowners, leaving equity untouched is a sound strategy. However, there are specific scenarios where accessing home equity might make sense, particularly for major home improvements or repairs.

Why Home Equity is a Smart Borrowing Option

When it comes to financing home improvements, using home equity can be a cost-effective alternative to more expensive borrowing methods like personal loans or credit cards. According to a recent Bankrate survey, 55% of homeowners see home improvements or repairs as a valid reason to tap into their equity. As of early August, the average home equity loan interest rate stood at 8.59%, while a Home Equity Line of Credit (HELOC) had an average interest rate of 9.37%. These rates are significantly lower than the average personal loan rate of 12.38% and the steep 24.92% average interest rate on credit cards.

Although cash from savings remains the most common way to fund renovations (used by 83% of homeowners), credit card usage for these projects is on the rise. According to the 2024 U.S. Houzz & Home Study, 37% of homeowners used credit cards to pay for repairs in 2023, up from 28% in 2022. While tapping home equity is generally cheaper, it’s not without risks, particularly in a high-interest-rate environment. Homeowners should have a clear plan for repaying any borrowed funds.

Adding Value Through Home Improvements

Investing home equity back into your property can be a wise move, especially when it comes to projects that not only maintain but also enhance the value of your home. Jessica Lautz, deputy chief economist at the National Association of Realtors (NAR), highlights that such improvements can pay off when you sell. For instance, NAR’s latest Remodeling Impact Report found that refinishing hardwood floors recovered 147% of the project’s cost, while new wood flooring recovered 118%.

Exterior projects can also yield significant returns, with new roofing recouping 100% of the cost. Lautz notes that projects like roofing are particularly appealing to buyers, who appreciate knowing that essential work has already been completed.

Avoid Tapping Home Equity for Non-Essentials

While it may be tempting to use home equity for luxuries like vacations or big-ticket purchases, experts advise against it. According to Bankrate, more than one in 10 millennial homeowners believe these are good reasons to access their equity. However, McBride strongly disagrees. “If you have to finance the cost of your vacation, you can’t afford the vacation,” he warns. Additionally, using home equity to buy depreciating assets like cars or electronics is doubly unwise, as you’re both purchasing something that will lose value and financing it with debt.

In summary, while home equity can be a valuable resource, it’s crucial to use it wisely. Focusing on projects that maintain or enhance your home’s value is a smart move, but tapping equity for non-essential expenses could lead to financial regret.

 

US 30-Year Mortgage Rate Drops on Weak Jobs Data and Fed Rate-Cut Signals

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The interest rate for the most popular U.S. home loan plunged last week to its lowest level in 15 months. This decline followed signals from the Federal Reserve that it could start cutting its policy rate in September, alongside weak job market data bolstering financial market bets on significant reductions in borrowing costs. The average contract rate on a 30-year fixed-rate mortgage dropped 27 basis points to 6.55% in the week ended August 2, according to the Mortgage Bankers Association. This was the lowest rate since May 2023 and marked the sharpest drop in two years.

This decline offers potential homebuyers some relief in an increasingly unaffordable housing market, where home prices and borrowing costs have both risen significantly. According to Fannie Mae’s housing sentiment index for July, only 17% of respondents felt it was a good time to buy a home, down from 19% in June, with 35% stating they would rent their next residence—the highest share since 2011. Doug Duncan, chief economist at Fannie Mae, noted that this sentiment might reflect buyer fatigue or a deeper disenchantment with the market.

The drop in interest rates also presents an opportunity for homeowners who purchased at higher rates to refinance and reduce their payments. Refinancing applications rose sharply to the highest level in two years, helping to increase the refinance share of overall loan applications to 41.7%. However, purchase activity edged up by less than 1%, constrained by low inventory and high prices.

The Federal Reserve’s aggressive rate hikes in 2022 and 2023 had driven borrowing costs to their highest levels in decades. However, cooling inflation and a slowing labor market have led to signals that a policy rate cut could be on the table as early as next month. The Labor Department’s latest jobs report showed an increase in the unemployment rate to 4.3% in July and a slowdown in hiring, raising fears of an imminent recession.

This labor market data triggered a rally in U.S. Treasuries, lowering yields and pulling mortgage rates down. Interest rate futures now reflect bets that the Fed will cut its policy rate by a full percentage point by the end of this year, starting with a reduction of half a percentage point next month. Despite these developments, a significant portion of homeowners hold mortgages with rates below 4%, suggesting that mortgage rates would need to drop further to make refinancing or purchasing a new home appealing.