Mortgage interest rates dropped last week to the lowest level since May 2023, causing a surge in mortgage demand from both homebuyers and especially current homeowners.

Total mortgage application volume rose 6.9% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was at the highest level since January of this year.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) declined to 6.55% from 6.82%, with points falling to 0.58 from 0.62 (including the origination fee) for loans with a 20% down payment.

“Mortgage rates decreased across the board last week … following doveish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected,” said Joel Kan, vice president and deputy chief economist at the MBA, in a release.

Applications to refinance a home loan, which are most sensitive to weekly rate changes, jumped 16% for the week and were 59% higher than the same week one year ago. While the percentage increases are large, they are still coming off a very small base. The vast majority of borrowers today have loans with rates below 5%. There are less than 1 million borrowers who can benefit from a refinance and shave at least 75 basis points off their current rate.

Applications for a mortgage to purchase a home increased just 1% for the week, but were still 11% lower than the same week one year ago.

“Despite the downward movement in rates, purchase activity only saw small gains, with an increase in conventional purchase applications offset by decreases in government purchase applications. 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,” added Kan.

Mortgage rates fell further to start this week, following a stock market rout Monday. They rose sharply again, however, on Tuesday after some more positive economic data.

“This is how things often play out when the bond market forces a quick move to extreme rate levels. For example, several of the biggest drops in daily mortgage rates have followed quick moves to long-term highs,” wrote Matthew Graham, chief operating officer at Mortgage News Daily.