The boom in mortgage refinancing takes hold as weekly demand increases by 20%

A steady decline in mortgage rates to two-year lows has current homeowners rushing to take advantage of potential savings.

According to the Mortgage Bankers Association's seasonally adjusted index, applications for home loan refinancing rose 20% last week compared with the week before. Demand was a whopping 175% higher than the same week last year.

That's because the average contractual interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.13% from 6.15%, and points increased to 0.57 from 0.56 (including the origination fee) for loans with a 20% down payment. The rate was 128 basis points higher the same week a year ago, or 7.41%.

“The 30-year fixed rate declined for an eighth consecutive week to 6.13%, while the FHA rate declined to 5.99%, breaking the psychologically important 6% level,” Joel Kan, vice president and deputy chief economist at MBA, said in a statement. “As a result of the lower rates, weekly gains for both conventional and government refinance applications rose sharply.”

According to Kan, the share of refinancing applications rose to 55.7%. While the jump compared to last year is large and the share now accounts for the majority of total mortgage demand, the level of refinancing activity is still modest compared to previous waves of refinancing.

Part of that is due to the seasonal slowdown in home buying. Mortgage applications to buy a home rose just 1% for the week and were 2% higher than the same week last year. Buyers are still facing elevated home prices and a limited supply of homes for sale.

“Average loan sizes were higher for both purchase and refinance applications, bringing the overall average loan size to its highest level in the survey's history at $413,100,” Kan added.

Mortgage rates haven't moved much to start this week, and will likely await more pressing economic data later in the week and in early October.