A sharp jump in mortgage interest rates over the past few weeks is taking its toll on mortgage demand. Total application volume fell nearly 7% last week compared with 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 ($548,250 or less) increased to 3.14% from 3.10%, with points rising to 0.35 from 0.34 (including the origination fee) for loans with a 20% down payment. That is the highest level since July. 

Refinance demand, which is especially sensitive to weekly interest rate movements, fell to the lowest level in three months, down 10% last week compared with the previous week. Volume was 16% lower than the same week one year ago. 

“Higher rates are reducing borrowers’ incentive to refinance, as declines were seen across all loan types,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. 

Mortgage applications to purchase a home declined 2% for the week and were 13% lower than the same week one year ago. It was driven by a drop in conventional loan applications. Government loans, which are mostly used by lower-income borrowers, saw a 1% increase in demand. 

“But that was still not enough to bring down the average loan balance of $410,000. With home-price appreciation and sales prices remaining very elevated, applications for higher balance, conventional loans still dominate the mix of activity,” added Kan. 

Rates fell back a little bit to start this week, but then moved higher again Tuesday. The bond market, which dictates daily rate movement, reacted to economic data.

“After an important report on the services sector came out stronger than expected, bonds continued to deteriorate,” said Matthew Graham, chief operating officer at Mortgage News Daily. “When bonds lose enough ground in the middle of a trading day, mortgage lenders occasionally make mid-day adjustments to their rate offerings.”