Mortgage rates fell for the second straight week, but more borrowers still sought savings in riskier loans

Mortgage rates fell for the second straight week, and that finally brought consumers back to their brokers. A growing share, however, applied for riskier loans at even lower rates.

Total mortgage application volume rose 3.4% 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, $832,750 or less, decreased to 7.37% from 7.41%, with points increasing to 0.76 from 0.75, including the origination fee, for loans with a 20% down payment.

"The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications," said Joel Kan, MBA's vice president and deputy chief economist in a release. "Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates."

And that is why refinance is still running well behind where it was last year. Applications to refinance a home loan rose 3% for the week but were 61% lower than the same week one year ago. About half of all borrowers today have a mortgage rate below 4%, according to data from the Federal Housing Finance Agency's National Mortgage Database.

Applications for a mortgage to purchase a home rose 4% for the week but were still 18% lower than the same week one year ago. While mortgage rates have pulled back some in the last few weeks, they are still much higher than they were just a few months ago, and home prices are still rising. Potential homebuyers are also worried about the broader economy, and, anecdotally, some agents say buyers are waiting to see the results of the mid-term elections.

As borrowers search for savings, more are opting for adjustable-rate mortgages (ARMs). The ARM share of applications increased to 11.3% last week, the highest level in more than a year. The average contract interest rate for 5/1 ARMs decreased to 6.41% from 6.46%. ARMs are considered riskier because they adjust to whatever the current market rate is at the end of their fixed term.

Mortgage rates haven't moved at all to start this week, according to a separate survey from Mortgage News Daily. That is because there has not been much economic data for the bond market to react to. While the Federal Reserve is not expected to announce any change in its interest rate at Wednesday's meeting, markets could move on any commentary from Fed Chairman Kevin Warsh.