Wed Jul 28, 2004
By Richard Leong

NEW YORK, July 28 (Reuters) - New applications for U.S. mortgages climbed last week for the first time in three weeks on a rise in applications for adjustable rate loans even as their interest rates rose, an industry group on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, moved slightly higher for the week ending July 23 by 0.6 percent to 621.4 from the previous week's 617.9.

Mortgage rates have trended upward in recent months on evidence of inflationary pressure and the Federal Reserve raising short-term U.S. rates.

However, mortgage rates have not risen enough to curb the robust home demand. More borrowers have shunned the 30 year fixed rate mortgage and increasingly turned to adjustable rate mortgages to finance their home purchases, economists said.

The number of purchase applications has increased by 4 percent over the past year, the group said.

"The purchase market continues very strong, in line with the numbers we have seen for new home and existing home sales," Jay Brinkmann, MBA's vice president of research and economics, said in a statement.

In June, previously owned homes sold at a record annualized rate of 6.95 million units, and their median price hit an all-time high of $191,800, the National Association of Realtors reported on Monday.

Sales of new homes fell in June but at a slower-than-expected annualized pace of 1.326 million units, the Commerce Department said on Tuesday.

ADJUSTABLE-RATE LOANS

Rates on adjustable mortgages are running as much as 2 percentage points below 30-year fixed-rate loans, according to the Mortgage Bankers Association.

Hybrid mortgages have exploded in popularity over the past few years. This type of adjustable loans allow borrowers to lock in rates for a set period with five-years being the most popular. Despite trending higher, ARM rates are lower than 30-year and 15-year fixed-rate loans.

Interest rates on mortgages whose rates are fixed for five years and reset each year thereafter averaged 4.67 percent, below 5.69 percent for 30-year loans and 5.13 percent for 15-year loans, according to Bankrate.com.

The Mortgage Bankers Association's index for adjustable rate mortgages rose by 6.9 percent last week to 4,536.5, but its index for fixed-rate loans fell by 2.3 percent to 434.4.

If ARM rates rise above those on fixed-rate loans, homeowners could simply refinance into fixed-rate loans, said Christopher Low, chief economist at FTN Financial in New York.

"People are looking to get in (to the housing market) with adjustable-rate mortgages, and refinance later into longer-term mortgages," Low said.

Meanwhile, the Mortgage Bankers Association's purchase index, a gauge of new loan requests for home purchases, rose last week by 1 percent to 444.8 from 440.3 in the prior week.

The group's seasonally adjusted refinancing index dipped by 0.1 percent to 1,648.8 from previous week's 1,651.1 continuing the trend toward reduced refinancing activity which has been pronounced since late March.

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