Mortgage applications surged 15.1% last week, and refinance applications were up 26%, as consumers rushed to cash in on declining rates, according to the Mortgage Bankers Association.

The average interest rate on a 30-year fixed-rate mortgage with a balance of $510,400 or less fell to 3.57% last week, from 3.73%, with 15-year rates as low as 3.03%. Americans took notice: Refinance volumes were up 224% from the same week a year prior.

A "for sale" sign in front of a house.

Image source: Getty Images.

"The 30-year fixed rate mortgage dropped to its lowest level in more than seven years last week, amid increasing concerns regarding the economic impact from the spread of the coronavirus, as well as the tremendous financial market volatility," MBA senior vice president and chief economist Mike Fratantoni said in a statement.

The momentum could continue to build this week. The Federal Reserve on Tuesday lowered the federal funds rate by 0.50% to a range of 1% to 1.25%, causing the yield on a 10-year Treasury note to fall below 1% for the first time in history. It is unlikely mortgage rates will decline as dramatically as the fed funds rate, but Fratantoni expects consumer interest in refinancing to continue to build.

"Given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize," Fratantoni said.

The drop is good news for consumers looking to buy a house or refinance, but tricky for banks that make their money based on the spread between the rates charged on loans and the rates paid in interest.