Mortgage rates fell to their lowest level in a month last week, leading to a notable jump in refinancing activity — though potential homebuyers remained cautious amid high prices and economic uncertainty.

According to the Mortgage Bankers Association (MBA), the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances (up to $806,500) declined to 6.37% from 6.42%, with loan points falling to 0.59 from 0.61 (including the origination fee) for borrowers making a 20% down payment.

This modest decline in rates prompted a 4% rise in refinance applications compared with the previous week, and applications were 81% higher than the same week a year ago, the MBA’s seasonally adjusted index showed. A year earlier, the average 30-year fixed rate was 15 basis points higher.

“The refinance index increased 4 percent, driven by a 6 percent increase in conventional refinances and a 12 percent increase in FHA refinance applications, as borrowers remain attentive to these opportunities to lower their monthly mortgage payment,” said Joel Kan, MBA’s deputy chief economist. “VA refinances bucked the trend and were down 12 percent.”

Kan also noted a renewed rise in demand for adjustable-rate mortgages (ARMs).

“ARM applications increased 16 percent over the week, which pushed the ARM share to 11 percent, with the ARM rate more than 80 basis points lower than the 30-year fixed rate,” he added.

Typically, ARM applications tend to rise when overall rates increase, not when they decline. However, analysts say the current uptick in ARM demand reflects high home prices, which are forcing buyers to seek more affordable financing options despite lower rates.

While refinancing activity picked up, mortgage applications for home purchases fell 5% for the week but remained 20% higher than the same period last year. Buyers appear to be waiting for further rate declines, even as more inventory becomes available and home prices soften in some regions.

Adding to the optimism, a separate report from Mortgage News Daily indicated that mortgage rates fell even further at the start of this week.

“Some lenders are offering their lowest rates in over a year, and some in over three years,” said Matthew Graham, chief operating officer at Mortgage News Daily. He noted that there was no single factor driving the decline, but rather a mix of market sentiment and easing inflation expectations.

Despite the short-term volatility, the broader picture suggests that borrowers are closely tracking rate movements, ready to act on any opportunity to reduce monthly payments or enter the housing market. Yet, affordability challenges — driven by persistently high home prices — continue to weigh heavily on potential buyers, keeping overall demand subdued even as mortgage rates trend lower.